TL:DR
- Issue SEIS Shares First: SEIS shares must be issued before EIS or Venture Capital Trust shares to maintain eligibility.
- Asset Limit: Ensure company assets do not exceed £350,000 when issuing SEIS shares to stay within qualifying limits.
- Investor Connections: Investors cannot be “connected” to the company (e.g., being an employee or holding over 30% shares) during the qualifying period to maintain SEIS relief.
- Advance Assurance and ASAs: Obtain Advance Assurance from HMRC for potential SEIS/EIS qualification and use Advance Subscription Agreements (ASAs) to handle investments, but reassess qualifying conditions when shares are issued.
Careful planning and adherence to SEIS rules can maximize investor tax relief and support early-stage funding.
For many start-ups in the UK raising external investment, their first investors are some of the most valuable, as they provide the initial funding to get the business ideas and plans off the ground.
The Seed Enterprise Investment Scheme (SEIS) is a tax scheme in the UK, that provides beneficial tax relief to early stage/angel investors in UK companies. Investing in a qualifying SEIS company allows the individual to get a tax reduction of up to 50% of the value of their investment, and therefore can be instrumental in encouraging these individuals to provide funding.
However, strict rules apply for the company to be a qualifying SEIS company, and when funding comes from several different sources at different times, it can be easy for the company to exceed relevant limits and for investors to lose up to 50% tax relief.
There are many rules to be satisfied in order for a company, the investor, and the investment to qualify for SEIS (or EIS) relief. Here, Onside Accounting cover some of the common issues that may result in the relief being lost.
What do I need to know?
If you are going through an investment funding round, and some of your investors are expecting/seeking SEIS relief, then the following points are important to note:
1) SEIS shares should be issued before EIS shares
In order to issue shares that qualify for SEIS, a company cannot previously have raised funds through the EIS or Venture Capital Trust schemes. Therefore, from a practical point, where a funding round has both SEIS and EIS (or other venture capital) investors, the SEIS shares should be issued to investors first (at least a day before the rest of the other investor’s shares).
2) Ensure the company assets do not exceed £350,000 at the time the SEIS shares are issued
SEIS focuses on smaller early stage companies, and a qualifying SEIS company cannot have assets of more than £350,000 immediately before the share issue.
Assets can come in many forms, but for an early stage start up this will commonly be cash. Founders may have introduced funds personally as a loan/capital to fund the early business activities, or the company may have already received some modest investments from business angels or family and friends. However, this early investment/funding can be the very thing that causes the £350,000 assets test to be exceeded. Therefore, preserving SEIS eligibility for subsequent investors needs careful navigation and timing.
Ensuring your SEIS investors are the first to introduce funds to the company (and to be issued with shares (see point 1) is the best means of navigating this. If the company finds itself in a position where the assets exceed £350,000, then it may be possible to spend some of this on the business prior to issuing the SEIS shares, to bring the assets back below the limit.
3) Don’t get connected
Early investment in a start up can often come from close friends, family, or close contacts who have an interest or experience in the industry. However, to be eligible for the scheme, an investor must not be “connected” with the company in the period beginning 2 years prior to the issue of the shares and ending 3 years after the issue (or 3 years after commencement of trade, if later).
Broadly speaking, an investor is deemed to be connected with an EIS company if they breach one (or both) of two main conditions.
1) The investor is connected with the company if they, or an associate, is an employee of the company. The associates here would include spouses, and ancestors or descendants, such as parents and children.
2) The investor is connected to the company if they hold more than 30% of the ordinary shares, or can exercise more than 30% of the voting rights.
For example, where a majority shareholder has received investment from their unmarried partner, this could qualify for SEIS/EIS. But if the two were then married within 3 years of the investment, then SEIS/EIS relief would be clawed back, as the partner is now deemed to be connected.
Similarly, if an investor became an employee of the company in the same period (subject to a specific provision for business angels who become directors and receive nil/reasonable remuneration for their involvement), SEIS/EIS would be lost.
Advance Assurance and Advance Subscription Agreements (ASAs)
There are two “Advance” matters that founders should also be mindful of: Advance Assurance and Advance Subscription Agreements (ASAs).
Advance Assurance for SEIS and EIS
Advance Assurance allows the company to ask HMRC if they will agree that a given investment will qualify for either SEIS or EIS, before the investment is actually made/relevant shares are issued. It is helpful from a funding perspective as the assurance can be provided to potential investors to give surety that their future investment should qualify for SEIS/EIS.
However, the Advance Assurance is only as good as the details it is based upon. It is still necessary to carefully review the conditions for SEIS/EIS relief at the time of the share issues, to determine if they can qualify, and any change in circumstances since obtaining Advance Assurance will also need to be considered.
Advance Subscription Agreements
Funding rounds often take weeks or months to facilitate, and even though investors may intend to commit their investment to the company, their shares may not be issued until the funding round completes.
An Advance Subscription Agreement (ASA) provides a means for an investor to pay subscription funds into the company straight away (so they can be used to fund the business), with the shares being issued at a later date.
Whilst investors who commit funds via an ASA can get SEIS/EIS relief on their investment, it is again necessary to assess the SEIS/EIS qualifying conditions when the shares are actually issued.
For example, if enough funds are raised via ASAs, the company may be in a position where its assets exceed £350,000 at the share issue date, meaning SEIS relief would not be available.
Key take aways:
SEIS and EIS are valuable tax reliefs, and can be key to obtaining early investment funding from early investors, business angels, friends, and family. When starting a new company, the key focus can be on obtaining as much funding as possible, as quickly as possible.
However strict rules apply to the company, the investor, and the investment, for them to qualify under these schemes, and it can be easy to fall foul of these rules, and lose SEIS/EIS for investors. Nevertheless, with care and attention, funding can be structured to allow investors to benefit from SEIS and EIS, which can maximise the funding a company is able to obtain and give it the best chance of success in those early months and years.
If you would like to discuss possible SEIS or EIS relief for your company, or simply want to learn more about how Onside can assist you and your company in all your tax and accounting matters, get in touch on hello@onsideaccounting.com
