SEIS Scheme Explained

The Seed Enterprise Investment Scheme (SEIS) scheme can help investors claim tax relief of up to £100,000 every year

What is the SEIS scheme?

HMRC established the Seed Enterprise Investment Scheme (SEIS) in April 2012 to assist startups in raising capital from interested investors by giving them tax relief on the investments made in companies that qualify for the SEIS scheme. 
The SEIS scheme can help investors claim tax relief of up to £100,000 every year, which potentially covers about 78% of the investment made towards startups.
There are two forms of schemes that help investors invest in startups. 

SEIS tax Relief Explained

Why was the SEIS scheme introduced?

The SEIS scheme was introduced to encourage investment into small businesses, which are considered risky investments. This scheme helps new businesses raise capital while reducing the cost of investments for the investors. 

When can the SEIS scheme be used?

When a small and new business issues new shares that meet the following criteria:
If a company meets the above criteria, investors can potentially invest in the company and receive the benefits under the SEIS scheme.

F6S can help with your SEIS tax relief claim

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Who can invest in a company that qualifies for the SEIS scheme?

To take advantage of the SEIS scheme, an investor must be an unconnected person to the company. Apart from that, an investor must:

What is the tax relief offered in the SEIS scheme?

An investor that invests in a SEIS scheme qualified company, can get 50% of their investment back as a direct tax reduction, up to £100,000

Benefits of SEIS tax relief

An investment made into a SEIS scheme qualified company  allows investors to get tax relief under the SEIS scheme.
Here are some detailed benefits and advantages of the SEIS scheme for the investors:

Companies that qualify for the SEIS scheme

Here are some detailed benefits and advantages of the SEIS scheme for the investors:
Type of companies that will be eligible for the SEIS scheme should meet the following criteria:

How do you apply for the SEIS scheme?

The company can start by getting Advance Assurance (AA), which is HMRC's way of confirming that investors in the company can get the tax benefits of SEIS when they purchase shares. When applying for the investment, the Advance Assurance must be thorough, defendable, and truthful. If not, it can make the Advance Assurance void.
Here is a step by step guide on how to apply for SEIS Advance Assurance:

Step 1. Make sure the right person from the company is applying for the SEIS scheme. A director or secretary of the company are the only people that can file for Advanced Assurance or authorise an application. You can also use an agent such as F6S to prepare, submit, and ensure the application is correctly processed.

Step 2. Gather essential information for the application.Provide information to HMRC and tell them that investments in the company qualify for SEIS. Some of the information you will have to prepare is:
  • The approximate amount that the company is going to raise
  • Company’s financial forecasts
  • Company’s business plan
  • Company’s most recent accounts
  • Details on how the company will use the SEIS investment
  • Information about the ongoing trading activities and how much the company plans to spend on each activity
  • Information about previous Venture Capital Trusts if the company has enrolled into and how much the company got from them
  • Latest memorandum/articles of association
  • Register of members, which must be from the date the company applies for Advance Assurance
  • The latest documents the company has used to explain business proposals to interested investors.
  • Documents that detail agreements between the company and its shareholders
  • The latest documents the company has used to explain business proposals to interested investors.
  • A signed letter issued from a company’s Director 
  • Any document that the company considers pertinent to SEIS
  • Details of at least one potential investor (this is a recently added requirement)
Step 3. Complete the Advance Assurance application online

Step 4. Send your application to the HMRC via Email.

Step 5. Wait for a response from HMRC.HMRC usually takes four to five weeks to respond with Advanced Assurance confirming whether a company qualifies for SEIS or not.
seis-scheme-explained

How can investors claim tax relief via the SEIS scheme? 

Step 1: Get the SEIS3 form from the company that the investor has invested in.

Step 2: The investor can claim on their Self Assessment tax return along with the SEIS3 form.

Step 3: Investors have up to 5 years to claim from the time the first investment is made.

How to apply for SEIS relief after receiving investment? (Get an SEIS3 authority from HMRC to issue SEIS certificates to your investors)

Step 1. Complete a SEIS1 (SEIS1 is a statement that must be filed with HMRC by the company that wants to issue SEIS scheme shares).
Head to HMRC’s website and complete the compliance statement SEIS1.

Step 2. Send the application to HMRC.
Download the form and send it to HMRC via email or agent.

Step 3. Get compliance from HMRC.Get your compliance certificates and the HMRC letter. Send completed compliance certificates and SEIS3 to your investors to prove that the investment is SEIS-compliant so they can claim SEIS relief.

Examples of the SEIS scheme in action:

Example 1
The company performs well and doubles in valueInvestment made = £20,000
Income Tax Relief = £10,000 (Investors can get 50% of their investments back as tax relief)
Profit = £20,000
Capital Gains Tax = £0 (Provided the shares are held for three years)
Tax free return = £30,000

Example 2
Three years have passed, and the company’s value has not changed
Investment = £20,000
Profit from sale = £0
Investor's gain = £10,000 tax relief

Example 3
The company stops trading completely and is out of business
Investment = £20,000
Income Tax Relief = £10,000 (Investors can get 50% of their investment back as tax relief)
Capital at risk = £10,000
Relief on loss made = £4,500 (45% of capital at risk)
Your actual loss = £5,500 (£20,000 – [£10,000 + £4,500])

What type of investors can take advantage of the SEIS scheme?

As per HMRC, the rules for an investor to be able to take advantage of the SEIS scheme are : 

  • The investors have to owe taxes in the UK.
  • Investors and\or associates must hold less than 30% of the company in share capital.
  • Investors must not be a relative of anyone connected with the company, except for siblings who are still eligible.  
  • Investors must not be business partners of people connected with the company.

F6S can help with your SEIS tax relief claim

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FAQs

How much can I invest in the SEIS scheme?

As an investor, you can invest up to £100,000 per year in one or more companies under the SEIS scheme.

What is SEIS carry back?

If an investor does not use their SEIS allowance for prior years, they are able to apply the prior year(s) SEIS allowance to their current year UK taxes, along with the SEIS allowance for the year in which they are filing the tax return. 

Here is an example:

In 2021 an investor does not use any SEIS allowance, thus creating a balance of £100,000.

The same investor in 2022 can use the allowance as a “carry back” along with the allowance of the year 2022, which means a total allowance of £200,000.

What is SEIS Advance Assurance?

SEIS Advance Assurance is a confirmation from HMRC that the company can qualify for the SEIS scheme given the information provided. SEIS Advance Assurance helps qualifying companies attract investors that can take advantage of the SEIS scheme.

What are the key risks involved while investing in the companies that qualify for the SEIS scheme?

There are significant risks when investing in companies that qualify for the SEIS scheme, namely that such early-stage companies are risky and the investor could lose the entire investment amount in an event like the company winding up, becoming worth less than the amount invested. These investment losses could affect the investor’s portfolio and future returns, although the loss is mitigated to some extent by the tax benefits of the SEIS scheme. However, if the SEIS eligibility of the investment is unclear or lost, this tax relief would not be available to the investor. Additionally, if the investor doesn’t have sufficient UK taxable income to take advantage of the SEIS scheme tax benefits, they will be unable to reduce the risk of the SEIS scheme investment through the SEIS scheme tax benefits.

Lock-in period for the SEIS scheme investment

An investor who invests in qualifying SEIS companies will have to ‘lock-in’ their investment and not sell their shares for three years. During this time, an investor will lose the SEIS scheme benefits if they exit their investment, unless a company gets listed on the London stock exchange or all shareholders decide to dilute their shares. 

Uncertainty of SEIS tax benefit

The SEIS scheme qualification criteria need to be met every year by the company. If the company stops adhering to these criteria, the investors would lose the SEIS tax benefits.