Launched on 6th April 2012, the Seed Enterprise Investment Scheme (or SEIS) is designed to spur investment in UK startups and early-stage businesses by offering tax relief for those investing.

The SEIS could be of particular interest to those struggling to raise finance through traditional means (bank loans etc.), as it makes investment all the more appetising for the third-party offering the money.

The main drawback compared to a traditional loan is that you will be giving up equity in your company. However, you won’t be charged interest and there won’t be as much pressure to repay the money as investors will usually allow their equity to mature before cashing out. Securing an investor can be valuable in other ways too – read Darren’s thoughts on the matter here.

Who is eligible?

You can read the full (rather exhaustive) rules in this PDF, however the main requirements for eligibility are as follows;

The company

  • Must be no more than two years old at the time of the investment
  • Must be permanently established in the UK
  • Must be an independent company (i.e. not a subsidiary of a larger firm)
  • Must not exceed £200,000 in total value, and must have less than 25 employees
  • Must not be primarily engaged in an “excluded trading activity” (e.g. property development, legal or accountancy services, various manufacturing activities – full list here)

The investor

  • Can be a director of the company, but must not be an employee
  • Must not have an existing “substantial interest” in the company

The details

Under the terms of the SEIS, eligible investors can invest up to £150,000 in a company (this is a lifetime limit). They must take a stake of less than 30% in the company. In return for their investment they can claim 50% tax relief, and also claim exemption from Capital Gains up to certain thresholds.

You may be thinking “Hang on, if the company can only be worth up to £200,000 and the maximum equity is 30%, how can someone invest £150,000? Surely the maximum investment would be £60,000?”

The key here is the difference between the value of the company in a purely monetary sense and the potential value of the company. If an investor decides you are the next Facebook they may value you at £1 million, even though in accounting terms your company only consists of you and your £500 laptop.

For clients taking on investment

The good news if you’re taking on investment from a third party is that all the accounting gymnastics – seeking SEIS approval from HMRC, subsequent issue of SEIS certificates to investors, Capital Gains exemption and the 50% tax relief – can be dealt with by Crunch. You can start the process by contacting your Account Manager.

If you’re wondering if the SEIS is right for your business – and if you’re operating an early-stage tech startup it most likely is – give your accountant a call to discuss it.

For clients investing

The combination of tax reliefs offered under the SEIS can be maxed out to a rather attractive 78% (Income Tax relief of 50%, plus Capital Gains Tax relief 28%), plus no tax on any uplift in the value of your investment (provided you hold the shares for more than three years).

All our accountants have been briefed on the ins and outs of the SEIS and can explain the tax ramifications for potential investors. Although it is a personal tax (rather than company tax) issue, SEIS investments can be dealt with through our Self Assessment service.

Photo by Jason Scragz