Understanding SEIS

The Seed Enterprise Investment Scheme (SEIS) offers a valuable opportunity for early-stage start-ups to attract investors by providing generous tax reliefs, including 50% income tax relief for investors.

For tech entrepreneurs navigating the challenges of securing equity funding, SEIS can be a game-changer. This guide explains the key considerations and requirements for companies planning to use SEIS.

Creating a Strong Business Plan

A well-crafted business plan is critical for SEIS approval. Here are some key elements to focus on:

Show Risk and Growth Potential:

Clearly outline the risks and challenges your business faces to demonstrate the potential for investor risk.
Avoid emphasising non-risky investments like buying buildings or stock that could be easily resold.
Highlight your entrepreneurial management team's commitment to long-term growth, not a quick exit.

Prove Active or Imminent Trading:

Demonstrate that your company is trading or actively preparing to trade. Pre-trade activities should go beyond fundraising or feasibility studies.
Include financial projections (3–5 years) and balance sheets, even if statutory accounts aren’t available yet.

Explain the Use of SEIS Funds:

Describe how SEIS funding will support growth (e.g., hiring staff, entering new markets, or acquiring customers).
Avoid suggesting that funds will cover operational costs, repay loans, or pay dividends.

Meeting SEIS Requirements

Certain rules and restrictions apply both during and after using SEIS:

Ongoing Compliance:

SEIS conditions must be maintained for up to three years after the share issue. Seek advice before making changes that could breach these rules.
Relief won’t generally be clawed back if the business fails naturally.

Restricted Activities:

Activities like farming, leasing, or running hotels are prohibited unless they form a minor part of operations.
Royalty income is allowed only if tied to intellectual property created in-house.

Timing Rules:

SEIS applies to a company within its first three years of trading.
For existing trades transferred into a company, ensure the trade itself is no older than three years.

Issuing SEIS Shares

When raising funds under SEIS, careful attention is needed to comply with procedural requirements:

Prioritise SEIS:

If using both SEIS and the Enterprise Investment Scheme (EIS), issue SEIS shares first as the tax reliefs are more generous.
Issue SEIS shares at least one day before EIS shares.

Manage Timelines:

Submit form SEIS1 to HMRC only after the company has traded for four months or spent at least 70% of SEIS funds.
Investors may want certificates quickly, so set expectations realistically.

Cash Payments for Shares:

Shares must be paid for in cash when issued. Avoid issuing shares before receiving funds, as this may disqualify SEIS eligibility.
Use an Advance Subscription Agreement if funds are needed urgently while awaiting HMRC decisions.

Batching Share Issues:

Issue all SEIS shares for a funding round on the same day to avoid filing multiple SEIS1 forms.

Investor Eligibility

The SEIS has specific rules about who can invest:

Directors Can Invest:

Unlike EIS, directors (but not employees) can invest under SEIS under certain circumstances.

Existing Shareholders:

Existing shareholders can invest as long as they meet all conditions and don’t own more than 30% of the company’s shares or rights for three years after the share issue.

Family Members:

Some relatives of employees, like parents and children, are excluded, but siblings and cohabiting partners are eligible.

Conclusion

SEIS offers start-ups a unique opportunity to attract investors and fuel growth during their early years. While many of its rules mirror the better-known EIS scheme, SEIS has its own nuances and requires careful planning to navigate successfully.

By preparing a strong business plan, understanding the requirements, and following procedural guidelines, your company can maximise the benefits of SEIS and position itself for future growth.

For personalised advice on SEIS, consult a tax professional to ensure your company stays compliant and fully benefits from this valuable scheme.