Financing start ups with SEIS

Raising finance for a start up company can be difficult at the best of times, but it can be somewhat easier if investors are protected should your company do less well than expected.

This is where the generous tax breaks offered under the seed enterprise investment scheme (SEIS) can come into play. The SEIS income tax reliefs alone mean that an additional rate taxpayer is risking just £2,750 of every £10,000 invested if the worst happens and your company’s shares become worthless. Investors will benefit by £5,000 if the shares do not grow in value, and if your company prospers the SEIS investment can be sold tax-free.

HM Revenue & Customs’s (HMRC’s) small companies enterprise centre (SCEC) will decide if your company and share issue qualify, and we recommend companies to get advance assurance of qualification. Not surprisingly, the qualifying conditions are quite stringent, including:

• If the company is already trading, the trade must have been carried on for less than two years.
• Various ‘safe’ trades, such as property development or running a hotel, nursing home or residential care home are not permitted.
• You must have fewer than 25 employees.
• Gross assets cannot exceed £200,000.
• The company has to be unquoted, although listing on the AIM or ISDX markets is permitted.
• There cannot have been any previous investment under the enterprise investment scheme or from a venture capital trust.

The total amount that your company can raise under the SEIS is limited to £150,000, and the shares issued must be full-risk ordinary shares and fully paid up.

Your investors won’t be able to claim any tax reliefs until you receive SCEC authorisation. However, you can’t apply for this until the company has either been trading for four months or at least 70% of the money raised by the share issue has been spent. Once authorised, the SCEC will issue the company with a certificate as well as tax relief claim forms for you to forward to your investors.

If your company has already started trading, you need to start planning well in advance of the two-year deadline. It could take up to two months to obtain advance assurance from the SCEC, and you will then need to find investors – they may not be interested until you have SCEC assurance.

In this edition

This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at 20 July 2015.