The Seed Enterprise Investment Scheme (SEIS) was launched by the government to drive investment in the early development of high potential growth businesses. Used properly the scheme is a highly tax-efficient way of investing in new companies. However, the generous terms of the scheme also appeal to certain taxpayers who might look to exploit the scheme for tax avoidance purposes.
Fortunately, we do not get many of the following examples of potential tax avoidance but we do like to take our clients’ challenges and find out the technical answer as to what is permitted and what is not under the ever-changing tax legislation. It is also very important to have an SEIS tax specialist consultant on board throughout your investment period so that you do not accidentally fall foul of the rules.
The rules are clear that an investor can only claim SEIS relief where the investment is made for genuine commercial reasons. Where the main purpose or one of the main purposes of an investment is the avoidance of tax no tax reliefs would be available.
The legislation also includes clauses to prevent reciprocal arrangements, whereby one investor invests in a company in exchange for another investor investing in his or a related persons venture.
There are also special rules in relation to linked loans whereby there can be no loans by the company to the investors or their associates which are linked to their SEIS investment. A loan is defined as linked if it would not have been made, or would not have been made on the same terms, were it not for the SEIS investment.
The legislation stops investors who hold a substantial interest in the company at any time from incorporation of the company to the termination date from investing. A substantial interest is defined as an investor directly or indirectly possessing, or having an entitlement to acquire more than a 30% stake in the company or a 51% subsidiary of the company via one of the following:
- ordinary or issued share capital
- voting power
- rights on winding up
- having control of the company
An employee of the company is not allowed to invest in the SEIS scheme belonging to their employer. However, a director is not treated as an employee and may invest once the other conditions are met.