Understanding SEIS

📘 Overview

The Seed Enterprise Investment Scheme (SEIS) is designed to help early-stage companies raise equity investment by offering generous tax reliefs, including 50% income tax relief for qualifying investors. For tech founders navigating the challenges of fundraising, SEIS can play a crucial role in unlocking early growth.

This guide explains the key requirements, practical preparation steps, and procedural rules your company needs to follow when planning to raise funds under SEIS.

📊 Creating a Strong Business Plan

A clear and credible business plan is essential when preparing for SEIS. HMRC will look for evidence that the business has genuine commercial potential and that investors are taking on real risk.

Show Risk and Growth Potential

To demonstrate that your business qualifies:

Explain the risks and challenges your business faces, including market conditions, technical uncertainties, or customer acquisition barriers.
Avoid presenting the company as low-risk (for example, emphasising asset-backed activities such as buying property or large amounts of stock).
Highlight the commitment and capability of your entrepreneurial management team, focusing on long-term development rather than a quick sale.

Prove Active or Imminent Trading

You should show that the company is trading, or preparing to start trading:

Pre-trade activity should extend beyond feasibility studies or simple fundraising.
Include 3 to 5-year financial projections and an early balance sheet (statutory accounts are not required at this stage).
Outline specific operational steps you have taken, such as pilot product development, early customer engagement, or supplier agreements.

Explain the Use of SEIS Funds

Investors and HMRC need clarity on how funding will be used:

Describe how SEIS investment will support growth activities such as hiring staff, developing technology, entering new markets, or acquiring customers.
Avoid suggesting that SEIS funds will be used for operational costs, loan repayments, or dividend payments, as these could invalidate relief.

🔍 Meeting SEIS Requirements

SEIS comes with rules covering both eligibility and what the company must maintain after issuing shares.

Ongoing Compliance

SEIS conditions apply for three years after the share issue.
Seek advice before making structural or commercial changes that could put relief at risk.
HMRC will not usually claw back relief if the business fails naturally despite genuine efforts to trade.

Restricted Activities

Some activities are limited or excluded:

Prohibited activities include farming, leasing, property development, or operating hotels and nursing homes (unless these are minor, ancillary activities).
Royalty or licence income is permitted only where the intellectual property is created in-house.

Timing Rules

SEIS is only available within the first three years of trading.
If a trade has been transferred into the company (e.g., from a sole trader), that trade must also be no more than three years old.

📘 Issuing SEIS Shares

Getting the share issue process right is essential to preserving eligibility.

Prioritise SEIS

If you are raising under both SEIS and EIS:

Issue SEIS shares first because the reliefs are more generous.
Issue SEIS shares at least one day before issuing any EIS shares.

Manage Timelines

To apply for investor certificates:

Submit the SEIS1 form only after the company has either
- traded for four months, or
- spent at least 70% of the SEIS funds.
Investors often expect certificates quickly, so set realistic expectations from the outset.

Cash Payments for Shares

Investors must pay cash for their shares at the point they are issued.
Avoid issuing shares in advance of receiving funds.
If you need funding sooner while waiting for HMRC, consider an Advance Subscription Agreement (ASA).

Issue all SEIS shares for a funding round on the same day to simplify administration and avoid multiple SEIS1 filings.

📊 Investor Eligibility

SEIS has specific rules regarding who can invest.

Directors Can Invest

Directors can invest under SEIS (unlike under some EIS rules).
Employees cannot. Founder-directors must ensure they meet all other qualifying conditions.

Existing Shareholders

Existing investors may participate as long as they:

do not own more than 30% of the company’s shares or voting rights during the three-year SEIS compliance period
meet all other qualifying investor conditions

Family Members

Investor eligibility varies across family relationships:

Not allowed: parents, grandparents, children, grandchildren (when related to employees)
Allowed: siblings, cohabiting partners, and many extended relatives

💡 Key Practical Points

Prepare a clear business plan that shows trading intentions, commercial risk, and growth potential.
Keep precise records of how SEIS funds are spent.
When raising both SEIS and EIS, always prioritise the SEIS share issue.
Pay close attention to timing rules, especially around the company’s trading start date.
Use ASAs where needed but ensure they meet HMRC requirements.
Set investor expectations early regarding SEIS1 processing times.

Summary

SEIS provides an excellent opportunity for early-stage companies to raise investment by offering highly attractive tax reliefs to investors. While the scheme shares similarities with EIS, SEIS has its own detailed requirements that founders need to follow carefully.

By preparing a strong business plan, understanding the eligibility criteria, and managing the share issue process correctly, your company can maximise the benefits of SEIS and lay strong foundations for future growth.

For tailored guidance and support with SEIS, we recommend speaking with a qualified tax professional to ensure ongoing compliance.