You're the proud founder of a start-up in its early stages: you're working relentlessly on your product, attempting to gain early traction, and asking for feedback from those early adopters so you can improve the user experience and value proposition.
But, here’s what you realise quickly: You seriously need an investor to part with funds to help you bring your ideas to fruition - an investor who believes in your vision and one who can possibly add value to your business in more ways than just cash.
If you’re a brand new UK registered company and you’re looking for investors who will believe in your vision, you need the Seed Enterprise Investment Scheme. The Seed Enterprise Investment Scheme (SEIS) is a real must to getting early investors on board.
Prior to its introduction, Angel investors may have stayed away from initial seed stage investment opportunities because they’re looking for a safer bet, but the introduction of Seed Enterprise Investment Scheme - or SEIS changed the whole early stage investment climate.
The SEIS scheme offers investors, including directors, initial tax relief of 50% on investments up to £200,000, as well as Capital Gains Tax exemption for any gains on SEIS shares. This is a huge incentive that cannot be underestimated and is often enough to convince angel investors to invest in those higher risk early stage and unproven start-up companies.
So from an investor perspective it's a very attractive incentive considering:
- Up to 50% tax relief
- No capital gains tax
- Additional loss relief
- Potential of high multiple returns
In this article, we will explain how your company can qualify for SEIS, allowing you to encourage investors by offering SEIS tax relief. Our guide includes the following:
- What is SEIS (The Seed Enterprise Investment Scheme)
- New Changes to SEIS Announced to start in April 2023
- SEIS tax relief for investors (Current) and (2023 onward)
- Criteria for fundraising under SEIS (Current) and (2023 onward)
- How to calculate tax relief for SEIS
- What is Advanced Assurance for SEIS
- What does the SEIS application form consist of?
- Which supporting documents are needed for SEIS applications?
- How can you find SEIS investors?
- The difference between SEIS and EIS
- Benefits of SEIS
- Key Takeaway
What is SEIS? (The Seed Enterprise Investment Scheme)
In 2012, the Seed Enterprise Investment Scheme was set up by the UK government to encourage investment in small, seed-stage companies by offering tax relief benefits to those who did so. The aim was to stimulate economic growth and stimulate the growth of the economy by giving new companies a better chance of growing, and quickly.
Wow, it really worked! In the 2017-2018 tax year, £189 million was raised for 2,320 companies and it has continued to be a key source for early stage investing.
If you are a UK company in its early stages with fewer than 25 employees and big ambitions, you may be eligible for SEIS...
What are the new changes for SEIS due to start in April 2023?
On September 23, 2022, the chancellor, Kwasi Kwarteng, announced the new government's Growth Plan 2022, which includes tax cuts for individuals and businesses, as well as a slew of other policies to 'significantly reduce inflation and support growth in the short term.'
The expansion of the Seed Enterprise Investment Scheme was one of the updates that caught our attention (SEIS). At the time of writing this guide, the announcement had not been made - We're updating to ensure this guide remains relevant today - and for the changes that are proposed to come in to play from the 6th of April 2023.
So what exact are the SEIS changes that early-stage start-ups need to know?
The SEIS scheme is to be improved next year. To summarise the main changes that improve the current scheme, take a look here:
- Companies will be able to raise £250,000 in SEIS from April 2023 – currently £150,000
- Companies will be able to raise SEIS within the first 3 years of trading – currently 2 years
- The criteria will be that companies must have less than £350,000 in gross assets to be able to raise SEIS – currently £200,000
Are there any changes to the SEIS scheme that investors need to know about?
Previously, investors could only invest a maximum of £100,000 per year in SEIS and up to £1 million in EIS. This has now been increased to a personal investor limit of £200,000 per year, which should free up more investor capital (at least from those with more than £100,000 in discretionary funds available for investment). All these promising changes to SEIS will happen from the new tax year of April 2023.
What are the benefits of the recent changes announced to the SEIS scheme?
UK SEIS limit being lifted from £150k to £250k has been significantly welcomed given its long overdue review!
Obviously being able to raise a further £100k in those early years is key in helping navigate through the high risk first 2 years when 80%+ of new companies will unfortunately fail.
Some additional benefits it may provide are:
- Helping to swing some investors to follow on from their first round given the extra lower risk relief.
- Helping with some of those really difficult early bridging phases
- Help to provide some much needed breathing space so companies can get further than before as they can gain more upfront runway and help them move towards early product market fit.
- The chance to gain more early stage Angels which may have been lost from the lack of SEIS available initially. The risk is still high in the SEIS stage and founders still need to be creating shareholder value, gaining traction, etc, but its a huge positive none the less and can't come soon enough!
SEIS tax relief for investors
Individual investors can benefit from numerous tax breaks under the Seed Enterprise Investment Scheme. These investments are not completely tax free but there is a lot of tax relief available for investors. These include tax breaks for income, capital gains, losses, and inheritances.
The reliefs are available on investments of up to £200,000 made through the scheme per tax year.
- Up to 50% income tax reduction offset against the amount invested
- Exemption from capital gains tax: Capital Gains Tax relief of 50% on investments in non-SEIS companies if the profits are reinvested in an SEIS-eligible company
- Loss relief for failed investments: If the business fails, the investor can claim loss relief equal to his or her highest marginal tax rate.
- Reinvestment tax breaks
- Inheritance tax exemption: SEIS shares are exempt from inheritance tax if held for at least two years.
- There is no CGT payable on any gains from the SEIS investment if the shares are held for at least three years.
Except for inheritance tax, the minimum holding period for all reliefs is three years. Shares held for at least two years qualify for inheritance tax relief. Plus, tax relief can be carried forward to the previous tax year if the investor has not already invested the funds.
This means that investors can apply the income tax relief to the tax year in which they make the investment or extend it back a year.
HMRC will then recoup reliefs granted on shares sold before the holding period expires.
Also note that to claim the maximum 50% relief available it is dependent upon having incurred sufficient income tax liabilities to offset against it, within the time period necessary.
Criteria for fundraising under SEIS
SEIS, which was introduced in former Chancellor George Osborne's 2011 Autumn Statement, is intended to assist early-stage businesses that are just getting started. If you intend to find investors through SEIS, you must first determine whether your company is suitable for the scheme.
Trades which are excluded for SEIS
To begin, ensure that your business operations do not fall into one of HMRC's excluded trades. Banking, insurance, or money lending are examples, as are property development, dealing in land or commodities, legal or accounting services, and generating or exporting electricity. HMRC's complete list of excluded trades can be found here.
SEIS Eligibility Criteria in Numbers:
The next step in determining your company's SEIS eligibility is to compare it to some official numbers. You need to show: the following from April 2023. We've kept the old criteria for reference too in the graphic below to clearly depict the changes.
- You've been in business for less than three years.
- Employ no more than 25 people.
- Have no more than £350,000 in total assets.
For Businesses outside of the UK
Even if your company is not based in the United Kingdom, you could be eligible for SEIS. HMRC will expect you to demonstrate that you have a "permanent establishment" in the United Kingdom. That is, you must prove that your company has a permanent place of operation in the UK or a UK-based agent through which business is conducted on a regular basis.
The Risk to Capital Condition
The Risk to Capital Condition, which was introduced to the SEIS criteria in 2018, needs you to demonstrate that:
As a result of the SEIS investment, your company's goal is to grow over time, and investors will be putting their money at risk by investing in your company.
This condition requires a two-fold narrative: convincing HMRC that you pose a risk to investors while convincing investors that funding you is a sound financial proposition!
How to calculate tax relief for SEIS (for investors)
Investors can invest up to £200,000 in a single tax year, which can be spread across multiple companies. They must not own a majority stake in any of the companies in which they invest.
To calculate your tax relief as an investor, begin by dividing the amount invested in a qualifying company by half. If you invest through a fund, deduct the upfront fund fees from the total.
This is the amount you can deduct from your income tax bill.
For instance, if you invest £10,000 in an eligible company, you can claim £5000 in income tax relief.
If that company fails, you may be eligible for additional loss relief.
How much funding can I raise with SEIS? (For founders)
Through the SEIS, your company can receive up to £150,000 in funding. This is a cumulative, rather than an annual, limit, and you must not have previously raised funds through EIS or venture capital trust (VCT) schemes.
The funds you raise must be spent within three years on one of the following:
- A trade that qualifies under the criteria
- Preparation for performing a qualifying trade
- Research and development that you anticipate will result in a qualifying trade
- You are not permitted to use the investment to purchase shares unless they are held by a qualifying 90% subsidiary engaged in a qualifying business activity.
What is Advanced Assurance for SEIS
So now you've determined that you ought to be eligible for SEIS funding and want to inform investors about the enticing investment opportunities you can provide. But before you do that, you should check with HMRC to see if your investment is likely to qualify.
This is known as advance assurance, and it can be used to demonstrate to investors that your proposed investment meets the scheme's requirements.
If you want to persuade investors to fund your venture, they will want to see "proof" that their investments will be eligible for SEIS tax relief. This is what the Advance Assurance (AA) is for. Before applying for SEIS, you should check with HMRC to see if your investment is likely to qualify.
This is known as advance assurance, and it can be used to demonstrate to investors that your proposed investment meets the scheme's requirements.
HMRC's confirmed AA letter verified that an investment in your company is likely to qualify for SEIS tax relief, provided that:
- Nothing has changed in the company's circumstances to disqualify it from SEIS;
- And that the information you provided to HMRC in support of your AA application is consistent with the information provided to investors.
Before they consider investing, the bulk of potential investors will want to see proof of your AA. As a result, it's critical to allow enough time (1-2 months) for your application to be submitted before you begin offering SEIS investment opportunities.
Which supporting documents are needed for AA for SEIS applications?
You must now gather the supporting documents for your application. These are some examples:
- Your most recent bank statements or account statements
- A current copy of the memorandum and articles of association of the company
- A presentation deck (essentially the same as you show to potential investors)
- A financial projection
- Documents attesting to prior investments or grants
Whether or not you receive advance assurance, you will still need the following to apply for SEIS:
- The amount of money you intend to raise
- Your business strategy and financial projections
- Recent financial statements
- All trading details, including how much you expect to spend on each activity
- Details of any other venture capital (VC) schemes in which you have raised funds from the most recent draught of your proposal to potential investors
How can you find SEIS investors?
Once your AA application has been approved, you'll be able to approach potential investors with certainty, knowing that their investment is going to be eligible for SEIS tax relief.
There are many ways to find SEIS investors and some of the most common sources are:
Angel Networking Events
Attending angel investor networking events in the hopes of meeting someone who shares your company's vision.
These are a rich source of active angel investors who naturally want to see those SEIS & EIS opportunities. Great examples of angel groups are: AngelGroups, Angel Academe, Bristol Private Equity Club, Minerva business Angels and Angel Investment Network to name just a few. You can find a list of the UK Angel groups in our investor database on FundingHero.
The UKBAA is the trade body for Angel and early stage investing that connects the ecosystem from Seed to Series A, where you can find valuable resources.
Specialist SEIS & EIS funds
The difference between SEIS and EIS
Because SEIS is intended for seed-stage businesses, if you are successful in growing your business, you may want to fundraise through EIS - the Enterprise Investment Scheme.
EIS has been previously described as SEIS's "elder brother." It was established in 1992 to provide a tax break for investors who invest in small-to-medium-sized businesses. SEIS and EIS have similar rules and benefits for companies and investors, but EIS is designed for slightly larger companies and reflects lower risk for investors.
The key criteria for EIS-eligible companies and SEIS are shown in the below graphic:
The main distinctions for EIS investors are as follows:
- Investors only get relief of 30% of their investment in income taxes, less than SEIS.
- They can defer up to 100% of the amount invested under the scheme against any CGT incurred up to one year before or three years after the shares are sold.
- Both schemes can be funded in the same funding round, but the SEIS shares must be issued before the EIS funds are transferred to you.
Benefits of SEIS
Advantages of raising funds through SEIS for businesses: The main advantage of the Seed Enterprise Investment Scheme for young businesses is the ability to raise funds you might not have access to if you were not involved in the scheme. Finding investors is extremely difficult, particularly if you’re new to business and don’t have as many connections as you would like.
There are rules to taking part, but unlike some other funds you might have access to, you are not prevented from using the money you raise to repay third party loans taken out for the purposes of trade (so long as those loans are not linked to your SEIS investor).
SEIS: To be or not to be?
SEIS is a fantastic opportunity for seed-stage companies because it provides investors with the motivation they need to fund you and help bring your vision to life through your start-up.
Small companies and early-stage start-up companies can struggle to find the investment to launch their businesses. Often traditional loans from banks and venture capital schemes are simply not available for early-stage companies. Therefore, other means of investment are needed.
Here, at FundingHero we’re on a mission to help aspiring or early stage founders raise their investment rounds successfully.
We help founders navigate the common issues they face when they’re trying to raise funds. Time constraints, lack of money, lack of time, and level of stress are all common reasons business owners fail to raise the funds they need when their company is at seed stage.
Only 1% of startups successfully raise their early stage investment. How do you make sure you are in that 1%? By removing the stress, simplifying the fundraising process, and raising funding like a FundingHero!