The seed enterprises investment scheme (seis) is essentially the little brother of the eis. SEIS was designed by hmrc to reward, by way of tax breaks, individuals that invest in early start-up businesses (usually companies with assets of £200,000 or less).
I’ve read about celebrities using tax evasion schemes, is this one of those schemes?
Absolutely not. In contrast to the celebrity tax evasion/tax avoidance schemes (which involved some, frankly, dubious transactions) the SEIS was set up by the government and hmrc in april 2012 with the express aim of providing income tax and capital gains tax (cgt) relief to individuals investing in seed businesses. The idea is, quite simply, to provide an incentive for people to invest in british start-up businesses, rather than investing in larger, existing corporations where the risk is much lower. The tax breaks are, in effect, compensation for a riskier investment.
Surely I’ve read that wrong…hmrc giving out tax breaks??
Contrary to public belief, every now and then the government like to devise and implement tax breaks (subject to certain conditions). With the current conservative government investing heavily in british start up ventures, they’ve created a clever way to attract investment – the seed enterprise investment scheme.
How does seis operate in practice?
Much like eis, seis benefits are twofold: a reduction in income tax liability and a reduction in capital gains tax liability. Income tax relief – you can claim 50% on investments up to £100,000 made on or after 6th april 2012.
Example: you invest £20,000 and can therefore claim a reduction of £10,000 against your income tax liability for the year (eg – if your income tax liability would ordinarily have been £15,000 – with the reduction, your liability would be reduced to £5,000).
Capital gains tax (cgt) relief – provided the shares have been held for at least three years any profit resulting from the sale of the shares is free from cgt – subject to certain conditions.
Example: you invest £20,000 and after three years the company has doubled in value. Your profit is £20,000 and the entire amount is free from capital gains tax (28%).
Overall then, taking into account both reduction in income tax liability and freedom from capital gains tax, on that £20,000 investment, you’ve saved £10,000 in income tax and £5,600 which would have been paid in capital gains tax – a total benefit of £15,600.
That’s all well and good, but investing in start-up companies is far riskier than investing in ftse 100 companies. What happens if the company goes under?
Wouldn’t you just know it, there’s a contingency in place for that too! In the unfortunate scenario that the company goes bust, you can claim a percentage of the ‘at risk’ capital back (based on your income tax bracket). It’s worth pointing out that, as with all financial investments, there’s always the possibility of making a loss. The seis simply steps in to mitigate the damage resulting from that loss
Example: You invest £20,000 – you’ve already received a £10,000 reduction in income tax liability, so the ‘at risk capital’ is £10,000. Based on 45% income tax bracket, you can claim £4,500 which, with the £10,000 income tax reduction, means that your overall loss is only £5,500 (which, on a £20,000 investment, is rather incredible).
Time for the small print
As you may well have guessed, though the government is keen to encourage investment in small businesses, they’re not offering tax breaks on every single possible investment; there are ‘qualifying criteria’. Though the qualifying criteria list is fairly extensive, we’ve attempted to note a few of the main conditions below:
- The company must have less than £200,000 of assets and less than 25 employees.
- An individual cannot purchase more than a 30% stake in the business.
- SEIS relief must be claimed within 5 years of making the investment.
- SEIS relief cannot be claimed until the company has been trading for more than four months and has spent 70%, or more, of the investment money.
- There are a large number of business activities which will preclude the business from qualifying for the seis scheme (financial activities, sale of land and renewable energy companies – investors of the last group already receive certain tax advantages) for a full list, speak with your accountant.
Whether you’re a small business looking to accept an investment or an individual looking to purchase shares in a start-up business it is of paramount importance that a proper shareholder agreement is in place from the very start. Of course, we’d be happy to tell you much more about shareholder agreements but essentially they set out, in plain english, the rights and the responsibilities of the shareholder and the company.
At hybrid legal we have a wealth of experience advising and drafting shareholder agreements for small, medium and large companies alike. If you’d like to discuss seis in more detail with us or have any general queries related to the legal side of the seed enterprise investment scheme, please do get in touch with us.