Seed Enterprise Investment Scheme (SEIS) – Starting Up Start-Ups
As a SME business investor, the Enterprise Investment Scheme (EIS) may not be for you, but you may like to try Seed Enterprise Investment Scheme (SEIS), or as the late Steve Jobs may have termed it, “EIS Nano”.
The idea for SEIS came out of the Government’s ‘Tax-advantaged venture capital schemes: a consultation’ in the summer of 2011. SEIS will support the Government’s growth agenda by helping smaller, riskier, earlier-stage UK companies – which may otherwise face barriers in raising external finance – to attract investment; facilitating these early stage companies to establish themselves and to grow.
SEIS will be similar in design to the current EIS but will focus on new early stage companies which are carrying on or preparing to carry on a new business and will commence from April 2012, applying to shares issued on or after 6 April 2012, but before 6 April 2017.
SEIS will provide income tax relief of 50% for individuals who invest in shares in qualifying seed companies and an exemption for Capital Gains Tax (CGT) on gains on shares within the scope of the SEIS.
To “celebrate” the scheme, the Government will offer a CGT “holiday”: all gains realised on the disposal of assets in 2012-2013 that are invested in the same year in shares qualifying for SEIS income tax relief will be exempt from CGT. The requirements are similar to that of the EIS, but have lower monetary limits.
The main points to note are:
(i) income tax relief of 50% is available on the amount invested;
(ii) there will be an annual investment limit for individuals of £100,000 and the investee Companies using the scheme will be able to raise a total amount of £150,000.
(iii) the investor cannot be an employee of the investee company from the date beginning with the incorporation of the company and ending with the third anniversary of the date the shares were issued to the investor (Qualifying Period), however, he can be a director;
(iv) the investor cannot own more than 30% of the issued share capital or be lent any sum from the the company during the Qualifying Period which would not have been made at all (or would not have been made on the same terms) if the investor had not subscribed for shares;
(v) the money raised must be for the purposes of the qualifying business actively carried on by the company;
(vi) the money must be spent by the third anniversary of the date of issue of the shares; and
(vii) the investor company must be unquoted, incorporated within two years prior to the investment, have a permanent establishment in the UK, be independent and not control any other company, have fewer than 25 employees and gross assets of less than £200,000, and not have received any previous EIS or VCT investment.
Eligible companies will need to have: – 25 or fewer employees, and – assets of up to £200,000 at the point of investment, and – have been established for two years or less, and – be carrying on, or preparing to carry on, a new trade which is one of the same trades as qualify under EIS.
To comply with the European Commission’s state aid rules, the company must meet a ‘financial health requirement’ at the time the shares are issued; so a SEIS investment cannot be used to rescue a company in difficulty. A company will be able to raise up to £150,000 in total and the maximum investment for an individual will be £100,000 a year. There must be no prearranged exit for investors and the company’s trade must be a genuinely new venture. The SEIS “window” will last five years.
It is important for investors and companies to note that, similar to EIS, relief can be clawed back and/or lost if the investee company ceases to qualify for SEIS during the qualifying period. Continued compliance with the requirements of the scheme must be carefully policed.
This is an extremely generous scheme which may not be around for too long. Qualifying investors looking to capitalise are entitled to income tax relief of 50% on their investment in the year of the investment, there is a complete capital gains tax exemption on gains made in 2012/13 which are re-invested in the same year under the SEIS scheme, and gains arising on shares on which SEIS relief has been claimed are exempt from capital gains tax.
The scheme will run alongside existing enterprise investment schemes and venture capital trusts and the Government has confirmed simplifications will be made to their rules.
The fundamental difference, other than the tax breaks, is that the SEIS focuses on investing in start-ups and other early stage companies looking to raise equity finance and allows investors to invest directly into one company instead of a vehicle that invests in several companies. Although this does increase the risk, it is hoped that the primary aim behind SEIS – to stimulate entrepreneurship and kick-start the economy – will ultimately trump any such risk.
These are exciting and opportunistic times for entrepreneurs…and for those shrewd investors who back the winners.
About our Team:
The Corporate Team at Gregory Abrams Davidson LLP specialise in connecting capital with opportunities – helping investors find the right opportunities, while working with high growth tech start-ups to ensure that they are “investor ready”. We are also geared up to and experienced at advising on, negotiating and successfully completing small private company transactions. We would welcome the opportunity to assist any interested party with their deal.
About the Author:
Jonathan Abrams is a Senior Associate Solicitor, with experience in advising both public and private companies, particularly start-ups, SMEs and investors. Jonathan’s practice focuses on corporate and business transactions, with a particular focus on the Media and Energy sectors. Jonathan is a qualified US attorney-at-law and continues to counsel clients in both the UK and the US.
If you require assistance or have any questions about Starting a business or investing in early stage businesses or SMEs, please don’t hesitate to contact our Corporate Team on 020 7979 2066 or email the author, Jonathan Abrams (firstname.lastname@example.org), Senior Associate Solicitor.