The Seed Enterprise Investment Scheme concept gives entrepreneurs a direct way of raising money for start-ups other than the banks.
Devised by former Chancellor of the Exchequer George Osborne in 2012, the measure was a response to the closed doors banks were showing business borrowers in the wake of the global financial crisis that hit in 2008.
He figured encouraging investors to buy shares in start-ups by offering generous tax reliefs would benefit entrepreneurs as well as the investors.
The main advantage of the investment for a start-up company is the cash injection is not debt, so millstone of interest and capital repayments is removed, easing cash flow.
But to join SEIS, entrepreneurs must jump through some hoops.
Qualifying for SEIS investment
- Carry out a trade that is a commercial business designed to generate profits
- Be based in the UK
- Have unquoted shares and not have any formal arrangement to become quoted or a subsidiary of a quoted company
- Not control another company or been controlled by another company since incorporation
- Not have assets worth more than £200,000
- Not be a partnership
- Employ fewer than 25 full-time equivalent workers when SEIS shares are issued
- Not have raised investment through the Enterprise Investment Scheme (EIS) or a Venture Capital Trust (VCT)
What is a qualifying trade?
A SEIS company must spend more than 20% of business activity on any of this list of excluded trades:
- Coal or steel production
- Farming or market gardening
- Leasing activities
- Legal or financial services
- Property development
- Running a hotel
- Running a nursing home
- Generation of energy, such as electricity and heat
- Production of gas or other fuel
- Exporting electricity
- Banking, insurance, debt or financing services
Keeping the tax man informed
Entrepreneurs cannot opt to tell investors they can claim SEIS tax breaks unless HM Revenue & Customs has issued a compliance certificate.
You can ask for advance assurance, which is basically SEIS pre-approval you can show investors to give them confidence that your business will attract the tax reliefs for them.
The other option is applying for the compliance certificate after issuing 70% of the shares and trading for at least four months.
Entrepreneurs should note that a separate SEIS application is needed for each round of capital raising by issuing shares.
Find out more about SEIS
HM Revenue & Customs publishes number of online guides about SEIS for entrepreneurs.