How Start-Ups Can Raise Investment Through SEIS

Raising investment is always going to be a top priority for any start-up but when you’re a founder you’re also focused on turning your innovative idea into a viable, scalable business. First-time founders can find the multitude of responsibilities overwhelming, especially knowing where to start. That’s why here, you’ll find need-to-know information on how you can go about securing your first round of funding through the Seed Enterprise Investment Scheme (SEIS).

What is SEIS?

SEIS, or the Seed Enterprise Investment Scheme, is a UK government backed tax scheme that aims to support qualifying early-stage start-ups by helping them attract investment from angel investors. In short, ensuring your company qualifies for SEIS can help you find investors much more easily.

How does SEIS work?

SEIS helps founders secure backing by offering generous incentives to those angel investors willing to put a stake in a high-risk start-up. There are both qualifying conditions for your company as well as eligibility requirements for the investors in order for the SEIS tax relief benefits to remain available to the investors. Failure from either party results in the withdrawal of the tax benefits.

What do investors get from SEIS?

The main attraction of SEIS for investors is that they are offered significant tax breaks on their investment:

• Firstly, 50% income tax relief can be claimed on the amount that has been invested, up to a maximum of £100,000 in any given tax year. What’s more, this tax relief can be carried back to a previous tax year for an instant tax rebate. 
• Secondly, any gain made from the investment in your company is exempt from Capital Gains Tax (CGT) when the investor disposes of their shares (so long as qualifying holding period has been satisfied).
• Thirdly, if the investor has disposed of other assets that do attract CGT, they are able to claim 50% CGT relief if the proceeds of those disposals are reinvested into SEIS shares.
• Fourth, should the investment be loss-making or the company fails, there is the option to claim loss relief against income on the remaining 50% of investment that did not receive the initial income tax relief or CGT relief against future gains.
• Finally, SEIS shares usually qualify for Business Property Relief against Inheritance Tax so long as they have been held for a minimum of 2 years by the deceased.

As you can see, ensuring your company gets SEIS right can therefore significantly boost your appeal to investors.

How much can I raise from SEIS?

Whilst there isn’t a limit to the number of fundraising rounds you can seek as an SEIS eligible company, there is however a lifetime limit to the amount of capital you can raise. The maximum limit is £250,000. Furthermore, the lifetime limit is further restricted by time because you are only able to raise SEIS investment for 3 years from the date your company started trading. Any investment received must be spent fully within 3 years of the shares being issued to the investors. From an investor’s point of view, the maximum they are able to invest in SEIS companies is £100,000 per tax year which can be split across multiple companies if they wish. You should therefore keep all this in mind when it comes to planning your fundraising strategy.

Another crucial note to be aware of is that your SEIS lifetime limit can be depleted if you have received any de minimis aid, such as receipt of government grants, within a 3-year period prior to and including up to the date of securing SEIS investment. So, for example, if you have received £10,000 in de minimis aid, your overall SEIS lifetime limit will be reduced by this amount to £240,000. By contrast, de minimis aid received after you have fully utilised your SEIS lifetime limit has no impact. This makes the timing of funding critical. For this reason, we strongly recommend working with an experienced advisor who can help you plan and sequence different funding sources strategically, ensuring you don’t inadvertently restrict your SEIS capacity or wider fundraising options.

How does my company qualify for SEIS?

To qualify for SEIS, your company must be able to meet all qualifying conditions – not just on the day that SEIS shares are issued to investors, but for a 3-year period afterwards as well. The rules are deliberately stringent because SEIS is intended to support genuine early-stage high-risk businesses that require the financial backing and not established companies that disguise themselves as start-ups.

As a UK government-backed scheme, SEIS is only available to British companies. Your business must have a permanent base in the UK which carries out the majority of the activity from here. That said, that does not mean you cannot have locations elsewhere if required for your business and there are no restrictions on where your customers are located (you can sell your goods or services globally).

Timing is critical as SEIS targets those businesses specifically in their infancy. This means that your company cannot be trading for more than 3 years at the point SEIS shares are issued. So, if SEIS funding is part of your growth strategy, it must be something that you prepare for early on as part of your business plan.

It is also important to understand that under SEIS, not every type of business activity qualifies. HMRC excludes certain trades because they are not considered genuine high-risk. These include, for example, dealing in land or property, asset-backed industries such as farming, coal or steel production, or shipbuilding, as well as lower risk sectors such as professional services, leasing and royalty-based businesses, hospitality, and financial activities such as banking or insurance. This is not an exhaustive list, but it illustrates the types of activities that fall outside the scheme. Full guidance can be found in HMRC’s manual.

Furthermore, there are clear size and balance sheet limits to be an SEIS-eligible company. At the time of investment, you cannot employ over 25 full-time equivalent employees or have gross assets over £325,000. This can sometimes be tricky for founders to balance, especially where you find yourself experiencing a period of accelerated growth or momentum. 

Autonomy is another key requirement. Your company must not be controlled by another company from incorporation, and it must not control another company unless that entity is a qualifying subsidiary. The rules around subsidiaries are detailed and tightly defined, so this is an area where specialist advice is particularly valuable.

Finally, your company must be unlisted. It cannot be trading on a recognised stock exchange when SEIS shares are issued, nor can there be any immediate plans to list. This doesn’t rule out an IPO or exit in the future — it simply means that, at the time SEIS investment is sought, the business must still be firmly in its early-stage growth phase.

What could disqualify my company from SEIS?

Even if you comply with the basic eligibility requirements above, you could still inadvertently disqualify yourself from SEIS. A common pitfall for first-time founders is prior funding. Where you have already secured investment through EIS (Enterprise Investment Scheme) or a Venture Capital Scheme, you’ll disqualify your company from SEIS. What’s interesting however, is that it is entirely possible to receive funding from all three schemes but only when structured and timed correctly.

Another common mistake that is easily made is that companies fail to maintain all qualifying conditions for the entirety of the 3-year period. With so many rules and limits to navigate, it’s easy to exceed one or more restrictions while focusing on scaling the business.

It’s also crucial to be aware of how and when SEIS funds must be used by. HMRC stipulates that any investment raised must be spent on qualifying business activities within 3 years of the share issue. Qualifying business activities excludes repaying existing loans, using the funds to pay dividends to shareholders, funding non-UK operations, or acquiring other businesses. This shows how important it is to have a careful plan of how you’ll intend to use the investment and within the given timeframe.

How to apply for SEIS

Now that we’ve covered the more complex elements of SEIS which include the eligibility criteria, going on to apply for SEIS is relatively straightforward in comparison. The first step is usually to seek Advanced Assurance from HMRC. This is confirmation that you can offer to investors that your company qualifies for the favourable SEIS benefits. Whilst it is an optional step, it’s incredibly valuable and should not be overlooked as you may find securing investors without it more challenging.

Once you have secured your investors, received the cash funding, you must then issue the shares. When this is done you can complete the SEIS1 form (also known as the compliance statement) and submit it to HMRC. This documents all the necessary details HMRC will need to monitor and ensure both the company and investor are following SEIS rules.

You’ll need to wait until HMRC has approved the SEIS1 form but when they do this, they’ll return an SEIS3 form to you as confirmation. This is returned to you as the company but it is your responsibility to then pass this onto your investors so that they are able to claim their tax relief.

Through the next 3 years be sure to keep meticulous records and supporting evidence to demonstrate that you remain within the conditions of SEIS should HMRC or investors question this.

Get help with your SEIS application

Navigating all the requirements of SEIS can be demanding and staying within the limits are crucial. Working with our expert accountants can therefore not only ensure your compliance forms are completed accurately but help guide you on your overall funding strategy to make sure you maximise all available opportunities to help your business grow. Book a consultation with a member of our team by completing the online form.