- 1st August 2018
- Posted by: Edward Kirkby
- Category: Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are UK government initiatives that offer tax relief to investors in return for investment in small and early-stage start-up businesses. The schemes are designed to help businesses raise equity finance and therefore ‘stimulate entrepreneurship and kick start the economy’.
The opportunity to attract investment through SEIS and EIS can make a big difference to your start-up or growing business so it is important to get the process right. To help you succeed in SEIS and EIS, here are 10 of the most common pitfalls you need to avoid:
- Investors will lose EIS income tax relief if they are ‘connected’ to the company, for example if they are an employee or director with more than 30% share capital or voting rights. This also applies to business partners and certain family members such as parents, children, grandparents, grandchildren, spouses and civil partners.
- If your company is raising funds through both SEIS and EIS, the EIS shares must not be issued on the same day as SEIS shares. SEIS shares must be fully issued at least one day ahead of EIS shares. If the shares are issued on the same day, HMRC will request that you withdraw from one of the schemes.
- The shares must not be issued before the investment has been received. If the investment is not in the company bank account when the shares are issued, this is a disqualifying investment.
- The shares must be paid wholly in cash, which includes payment by cheque and other means, and the cash must be paid in full at the date of share issue.
- The shares issued under SEIS and EIS must be full risk ordinary shares. This means that the shares must not be redeemable or carry any special rights to the assets of the company. The shares can have limited preferential rights to dividends but the rights to receive dividends cannot be allowed to accumulate or allow the dividends to be varied. When the shares are issued there cannot be an arrangement:
- To sell the shares at the end of, or during the investment period.
- To guarantee the investment or protect the investor from any risks.
- To raise money for the purpose of tax avoidance – the investment must be for a genuine commercial reason.
- For a reciprocal agreement where you invest back in an investor’s company to also gain tax relief.
- To structure your activities to let an investor benefit in a way that’s not intended by the scheme.
- To receive investment under EIS, you must apply within 7 years of your company’s first commercial sale. To receive investment under SEIS, your company must have been trading for less than 2 years.
- You cannot file the SEIS1/EIS1 form and therefore gain full clearance until your company has traded for at least 4 months, or your company has spent 70% of the investment.
- An investor cannot receive more than 30% in ordinary share capital, issued capital or voting power in exchange for their investment. If they receive more than 30% they will not qualify for tax relief under SEIS or EIS. This 30% takes into account the shareholdings of people who are classed as ‘associates’ of the investor such as business partners, spouses, parents, children and grandchildren.
- The investor must have taxable income which is at least equal to the investment made for tax relief to be available in full in the tax year.
- The legislation around SEIS and EIS is updated regularly so be aware of any changes as they may affect your company’s eligibility. If there is a long delay between obtaining advance assurance and issuing the shares, it may be the case that your company’s circumstances mean it no longer qualifies.
It is important to avoid the above pitfalls as they could result in the investor losing their entitlement to the tax relief they are expecting to receive, and your company may not receive the funding you need to grow.