The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. It complements the existing Enterprise Investment Scheme (EIS) which will continue to offer tax reliefs to investors in higher risk small companies. SEIS is intended to recognise the particular difficulties which very early stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS.
SEIS applies for shares issued on or after 6th April 2012. The rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.
Please note that the legislation governing SEIS will not become law until the Finance Bill receives Royal Assent, expected to be in July 2012. It is the government’s intention that the legislation, and the tax reliefs available will apply in respect of shares issued on or after 6th April 2012. HMRC cannot provide an assurance before the date of Royal Assent that any shares issued will qualify for relief.
Shares must be paid up in full, and in cash, when they are issued.
Please note that one of the most common reasons for investments failing to qualify for relief under EIS (which may also apply to SEIS) is that shares are issued to investors without the company having received payment for them. This sometimes happens when a new company is registered at Companies House and shares are issued to members as part of the registration process, but the company takes some time to set up a bank account and the shares are not paid for until that has happened.
HMRC advises companies and investors to ensure that any shares on which it is intended SEIS relief will be claimed are not issued during the company registration process but are issued only at a later date when the company is able to receive payment for them.
Shares must be full risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up. Shares may carry limited preferential rights to dividends, but may not include rights where either:
- The rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. (NB this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so).
- The right to receive dividends is cumulative – that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it a later time, normally once funds become available.
There must be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements at the time of investment for the shares to be sold at the end of the relevant period. The shares may not be acquired using a loan made available on terms which would not have applied other than in connection with the acquisition of the shares in question. The shares must not be issued under any reciprocal arrangements, where company owners agree to invest in each other’s companies in order to obtain tax relief.
Income Tax relief is available to individuals who subscribe for qualifying shares in a company which meets the SEIS requirements, and who haveUKtax liability against which to set the relief. Investors need not beUKresident.
Relief is available at 50% of the cost of the shares, on a maximum annual investment of £100,000. The relief is given by way of a reduction of tax liability, providing there is sufficient tax liability against which to set it. Please note that the relief cannot be set off against the notional tax credit on dividend income, as that tax credit is not recoverable.
As an investor you may be eligible for tax relief providing:
- You have subscribed for shares which have been issued to you and which at the time of issue were fully paid for. You may subscribe via a nominee.
- You do not have a substantial interest in the company, at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares. Substantial interest is defined as owning more than 30% of the company’s issued share capital, or of its voting rights, or of the rights to its assets in a winding up. Shareholdings of associates are taken into account in arriving at the 30% figure. Associates include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives. Relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren. Brothers and sisters are not counted as associates for SEIS purposes.
- You are not employed by the company at any time during the period from date of issue of the shares, to the third anniversary of that date. For this purpose, you are not treated as employed by the company if you are a director of the company.
When relief will be withdrawn or reduced
Tax relief in this section means both Income Tax relief and capital gains reinvestment relief.
HMRC will withdraw tax relief if, at any time during the three years from date of issue of the shares if:
- You become employed by the company without being a director of the company.
- Your holding in the company becomes a substantial interest (see Investor requirements above).
- The company loses its qualifying status.
Tax relief will be either withdrawn or reduced if at any time during the three years from date of issue of the shares if:
- You dispose of any of the shares (other than to a spouse or civil partner – in those circumstances the shares are treated as though the spouse or civil partner had subscribed for them).
- You or an associate receive value from the company, or from a person connected with that company. The rules to do with receiving value from the company are similar to those for EIS. It can include the company repaying any of its shares or securities which you hold; repaying a debt owed to you, if that repayment is in connection with the issue of shares; you receiving a loan or benefit from the company; or the company selling an asset to you at less than market value (or you selling an asset to the company at more than market value). How much tax relief is withdrawn will depend on the amount of the value received. In significant amounts of value received can be ignored, and there is also scope for relief to be retained if the value received is made good by the investor as soon as is practicable.
Please note you are required by law to tell your tax office within 60 days of any of the above events occurring.
There is a ‘carry back’ facility which allows all or part of the cost of shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year. The SEIS rate for that earlier year is then applied to the shares, and relief given for the earlier year. This is subject to the overriding limit for relief each year.
Please note that there is no SEIS rate for a year earlier than 2012/13 so there is no scope for carrying relief back before that year.
Tax reliefs available – capital gains reinvestment relief
This relief is for the tax year 2012/13 only. If you dispose of an asset which would give rise to a chargeable gain in 2012/13, and reinvest all or part of the amount of the gain in shares which also qualify for SEIS income tax relief, the amount reinvested will be exempt from capital gains tax. The £100,000 investment limit which applies for income tax relief also applies for reinvestment relief. The ‘carry back’ facility applies for capital gains reinvestment relief as it does for income tax relief.
The asset does not have to be disposed of first; the investment in SEIS shares can take place before disposal of the assets, providing that both disposal and investment take place in 2012/13.
Tax reliefs available – capital gains disposal relief
If you have received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years, any gain is free from Capital Gains Tax.
NB If no claim to Income Tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from Capital Gains Tax.
A company cannot issue shares under the SEIS scheme if it has already had investment from a VCT, or issued shares in respect of which it has provided an EIS compliance statement (EIS1).
This guidance provides an overview of SEIS. It does not cover all the rules in full detail. For more detailed advice about investing in a SEIS, please call us on 0161 832 4451.