The Seed Enterprise Investment Scheme (SEIS) is similar to the EIS but focuses on smaller, early-stage companies carrying on, or preparing to carry on, a new business in a qualifying trade. The SEIS scheme is only suitable for small unquoted companies and the rules of the scheme make that clear.
The fact that the SEIS provides extensive Income Tax and Capital Gains Tax breaks for investors greatly encourages much-needed seed capital in new businesses. However, it is important that any business looking to raise start-up investment does not just focus on the SEIS scheme rules but also on making the venture attractive to potential investors.
For its investors to be able to claim and keep the SEIS tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. Some of these apply only at the time the relevant shares are issued. Other conditions must be met continuously, either for the whole of the period from the date of incorporation to the third anniversary of the date of issue of the shares or in some cases, from the date of issue of the shares to the third anniversary of their issue. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.
One of the most important conditions to be met in order to be able to use the SEIS is to ensure that the qualifying trades conditions are met. A qualifying trade is defined by HMRC as a trade which is conducted on a commercial basis with a view to the realisation of profit. Whilst most business activities qualify, there are a number of important business types that are excluded. The list of trades that are excluded for the purposes of qualifying for SEIS includes property development, operating or managing hotels or nursing/care homes and a number of financial activities.
There are also special rules that stop the scheme being used for tax avoidance. A new start-up that adheres to the SEIS qualifying criteria will find itself in a far better position than many of its competitors to attract investment and start growing its business. A further fundraising round using the EIS or VCT schemes can take place within a short time after the SEIS investment and is helping business and investors succeed.
If you would like to discuss further the benefits of seeking investment, please get in touch. We would also recommend that any start-up seeking investment applies for advance approval from HMRC.