As the crisp frosty mornings become increasingly more frequent and hibernation begins, what better time to consider investing in a new start business and watching it flourish and bloom!
Many of you may have heard of the Seed Enterprise Investment Scheme (‘SEIS’) but what actually is it and what are the advantages to investors?
SEIS was introduced in April 2012 by HMRC to help early stage companies raise finance from individual investors by providing them with various advantageous tax reliefs on the investments they make into qualifying companies.
SEIS allows investors to claim a number of tax reliefs on up to £100,000 invested through the scheme per annum. Such reliefs include (but are not limited to) income tax relief, capital gains tax relief and loss relief.
Which companies can use the scheme?
A company can use the scheme if it:
- carries out a new qualifying trade. Most trades will qualify, however there is a specific list of non-qualifying trades which must not account for more than 20% of the business. It is therefore advisable to seek advice on this. Such trades include (but are not limited to) property development, running a hotel, generation of energy, legal or financial services.
- is established in the UK.
- is not trading on a recognised stock exchange at the time of the share issue.
- Has no arrangement to become a quoted company or a subsidiary of one at the time of the share issue
- does not control another company, unless it is a qualifying subsidiary
- has not been controlled by another company since the date the company was incorporated.
In addition, the company must:
- not have gross assets over £200,000 when the shares are issued;
- have less than 25 full equivalent employees in total. when the shares are issued;
- continue to qualify for SEIS for 3 years after the investment is made.
About the investment
The shares that are issued to the investor must be paid up in full, in cash, when they are issued. The timing of events is crucial to ensure that the funds cannot be considered a loan. What must happen is:
1. The investor gives the company a share subscription letter and arranges for payment of the subscription funds; and
2. The company then issues the shares, writes up the share register in the company statutory books, issue the share certificate and notify company’s house.
The shares which are issued must be full risk, ordinary shares that are non-redeemable and carry no special rights to assets. The shares can have limited preferential rights to dividend. However the right to receive the dividend cannot be allowed to accumulate.
The money raised from the investment, must be spent within 3 years of the share issue and the Company must spend the money on either:
- A qualifying trade;
- Preparing to carry out a qualifying trade; or
- Research and development that’s expected to lease to a qualifying trade.
What an Investor must watch out for
- The investor must not be connected to the Company – this means that they must not directly or indirectly control more than 30% of the share capital.
- The maximum amount which can be raised by the Company through SEIS is £150,000. This is an overall limit, not an annual limit.
- The company must have been incorporated within 2 years of the date on which the qualifying shares are issued.
- The investor cannot claim the SEIS relief until at least 70% of the monies have spent by the qualifying company.
If you are considering investing in a company and are seeking legal advice on this then please contact our corporate and commercial team on 01524 548494 or 01228 552600.