9 July 2012
The Seed Enterprise Investment Scheme (“SEIS”) has been introduced as part of Finance Bill 2012. The SEIS is a new scheme offering significant tax incentives for inward investment into early stage, small companies.
Readers may already be aware of the Enterprise Investment Scheme (“EIS”) which provides a range of tax incentives for attracting inward investment into small and medium sized companies. Finance Bill 2012 made a number of changes to the EIS, which although not the subject of this note, are worth reviewing.
Many of the detailed rules around the SEIS are similar in construction to those of the EIS. The differences in rules are designed to focus the SEIS on certain size companies. We summarise in this note the key points of the SEIS. The remainder of this note is not a comprehensive summary of all the rules and conditions. Specialist advice should be sought.
Some of the key features of the SEIS are as follows:
- The SEIS applies to investment in companies, and not in sole traders, partnerships or limited liability partnerships.
- The SEIS would apply to new shares issued by qualifying companies on or after 6 April 2012.
- The scheme is set to run to 5 April 2017. This may or may not be extended in the future.
- The amount that a company can raise under the SEIS is limited to £150,000 in total.
- The amount an individual investor can invest in SEIS companies and claim tax relief is a maximum of £100,000 in any one tax year.
- Investors will not be able to claim tax relief until the company has spent 70% of the money raised, or has been trading for four months.
- The company must use money raised within three years and for a qualifying business purpose.
- As with the EIS, companies who wish to use the SEIS can apply to HMRC for advance assurance of SEIS status.
The tax reliefs The tax reliefs available to an individual investor may include:
- Income Tax relief of 50% of investment. Note that the relief is 50% regardless of the marginal rate of tax paid.
- There is an Income Tax relief carry back facility, which commences in 2013/14.
- Capital Gains Tax (“CGT”) reinvestment relief (2012/13 only) – gain arising on asset disposed of in 2012/13 can be exempt from CGT to extent reinvested in SEIS.
- CGT exemption on SEIS shares after 3 years.
- Loss reliefs (subject to restrictions) in the event of loss on SEIS investment.
- SEIS investment should qualify for Business Property Relief for Inheritance Tax purposes after 2 years.
In order to determine whether an investor may benefit from one or more of the available tax reliefs, advice should be sought.
Company – qualifying conditions
A number of conditions apply to prospective SEIS companies. Some of the most important conditions are that to qualify, a company:
- Must have less than 25 employees.
- Must have gross assets of less than £200,000.
- Must have been trading for fewer than 2 years.
- Must not have raised any money from EIS or VCT investors.
- Must carry on a genuine trade that is not an excluded trade.
There are also numerous conditions that the company must satisfy for 3 years post investment.
Investor – qualifying conditions
A number of conditions apply to investors. Some of the most important conditions are that to qualify, an investor:
- Must not be an employee of a company (note that a director is not treated as an employee for this purpose).
- Must not hold more than 30% of the shares, voting power or entitlement to assets in the event of winding up.
- Must have paid sufficient Income Tax and/or CGT to benefit from the tax reliefs.
- Can be a director, providing they meet other investor tests.
There are also numerous conditions that the investor must satisfy for 3 years post investment.
The tax incentives offered under the SEIS are without doubt very attractive. If there is a disappointment about the scheme it is some of the stringent qualifying criteria which will prevent some companies obtaining SEIS status. As with the EIS, the SEIS rules and conditions are complex and require a deep understanding to ensure compliance. All of the additional complexity is of course on top of ongoing SEIS compliance which will need, like with the EIS, to be reviewed and monitored throughout the 3 years post investment. One interesting point is how closely one needs to consider the date that trade commenced (with reference to the 2 year rule); we don’t have such a rule for EIS and the question of when one commences trade can itself be a very complex issue. What the limits on investment do mean from a company perspective is that it may often be the case that a company requires inward investment of more than £150,000 (the limit of the SEIS) and would like to also use the EIS. This is possible, in stages, however careful implementation is needed to ensure that investors obtain both sets of reliefs as they expect.
For further information on the SEIS from a company or investor perspective, please contact us.
Tel : 01788 539000
Email [email protected]
Magma is a leading firm of Chartered Accountants and Chartered Tax Advisers, providing a wide range of professional advisory services to owner managed businesses and private individuals. Magma thrives on its work with entrepreneurial businesses and their people. Magma works closely with its clients, delivering proactive and innovative advice. Our focus is on building long term relationships with our clients to help them and their businesses succeed, reduce taxation and create, increase and protect wealth. Magma offers a breadth of technical expertise and specialist advisers across six integrated service areas: Audit and Assurance, Business Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth Management.
This document has been prepared as a general summary. It has been written for information purposes, should not be relied upon and is not a substitute for professional advice which should be sought. This document does not constitute taxation, financial planning or investment advice. Neither Magma Chartered Accountants or any of its employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document. Magma Chartered Accountants is the trading name of Magma Audit LLP, a limited liability partnership (Registered in England No. OC370086). Magma Audit LLP is a subsidiary of Magma Partners LLP (Registered in England No. OC370051). The registered office of both LLPs is: Bloxam Court, Corporation Street, Rugby, CV21 2DU. Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Magma Partners LLP is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. A list of members is available on request.