SEIS: why investors and start-ups love it and how to apply

The Seed Enterprise Investment Scheme is a must-use fundraising tool for any UK-based companies. If your company gets SEIS status, the UK government gives your investors 50% of their investment back as a tax cut and gives them over 70% downside protection.

Style Counsel got SEIS approval last week, and we’ve already seen what a huge difference it makes — quite simply, investors are willing to invest more.

In this post, I am have given a quick explanation of what SEIS status does and how companies can get it. Accountants will offer to do the application for about £1,500, but as a start-up, you should not be paying these fees for something you can do yourself with a bit of elbow grease and research.

Why investors and start-ups love SEIS:

• Investors get 50% of their investment back as Income Tax relief, on a maximum annual investment of £100,000. (e.g. an investor invests £20,000 in SEIS. The relief available is £10,000 (£20,000 at 50%). If the investor owes £15,000 tax, this is reduced to £5,000 as a result of their investment.)
• Investors pay no Capital Gains Tax if they hold the shares for at least three years (which they likely will since this SEIS is for early stage start-ups).
• Downside protection: the amount you receive in loss relief is equal to your investment minus the 50% you received back multiplied by your tax rate. Here is an example for a UK taxpayer who pays tax at 45% and who invested £50,000 in a company which failed completely:

The above example shows that if someone invests £50,000 in a company with SEIS approval, only £13,750, i.e. 27% of capital invested, is at risk.

Here are some other important points to note:

· The company can raise up to £150,000 to get SEIS relief. If you want to raise more, you should apply to the Enterprise Investment Scheme (this gives income tax relief of 30%).

• An investor’s stake in the company can be no more than 30%
• The company must have fewer than 25 employees and assets below £200,000
• UK taxpayers are eligible to benefit. It does not matter if they are UK nationals — it only matters where they pay their taxes.

How to get SEIS status:

Accountants will offer to do the application for you for about £1,500, since this will likely equate to 1% of the money you raise, you really should do it yourself. It isn’t fun, but it’s not rocket science.

As a company, you need to apply to advance assurance from HMRC. Once your application is approved, you will get a letter saying you have been granted advance assurance. You can then take it to investors, telling them that their investment qualifies for SEIS relief.

The form is only annoying to fill in because some of the questions are unclear if you have never answered them before. I spent some time researching and calling the HMRC and have listed my tips below.

1. Open the HMRC link to apply for SEIS advance assurance: https://public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:///Applications/CorporationTax/1.0/EIS-SEIS(AA)&template=EIS-SEIS(AA).xdp

2. When you fill out the application, here is what you need to put in:

a. TO: “Small Company Enterprise Centre (Admin Team)”

b. TAX REFERENCE NUMBER: a 10-digit number that can be found on many company documents sent from HMRC.

c. HMRC OFFICE CURRENTLY DEALING WITH YOUR AFFAIRS: I put HMRC and my application was accepted.

d. THE COMPANY INTENDS TO RAISE APPROXIMATELY: put a number below £150,000

e. THE MONEY RAISED BY THE SHARES WILL BE USED FOR: I put product development, marketing and overheads. I listed examples for all three.

f. THE FOLLOWING DOCUMENTS/INFORMATION ARE ATTACHED: you do not have to attach everything in the list and you can say that some of the documents are drafts, e.g. you can say your business plan and shareholders agreements are drafts, which will be finalised when you raise funds. I recommend calling the SEIS team to check what is absolutely necessary if you cannot attach everything on their list. Here is the number: 0300 123 1083

g. SUPPORTING DOCUMENTS: I included a cover letter explaining what the company does, saying that some supporting documents were drafts and mentioned that the company met SEIS requirements (fewer than 25 employees etc).

3. You can email all the documents to enterprise.centre@hmrc.gsi.gov.uk with this subject line: SEIS Advance Assurance Application. This is much faster than sending them in the post.

It will take 6–8 weeks from when you submit the application to get your advance assurance approved. I recommend calling the SEIS team after you submit your documents to make sure that they have received them and to find out what your place in the queue is.

As you can see, your company and your investors can get great benefits with Seed Enterprise Investment Scheme relief and getting it is not difficult. Now go fund yourself! :)

Good luck!

This article was originally published on www.creativityandcapitalism.com