Raising Money with Seed Enterprise Investment Scheme SEIS

Your business can be profitable and still need investment to take its next step. Recruiting a team, developing products or entering a new market can require more money than the business can comfortably fund from its own cash flow.

For younger companies, the Seed Enterprise Investment Scheme, usually called SEIS, can make that investment more attractive. It offers tax relief to qualifying investors who buy new shares, helping founders raise money to grow their business.

For founders, SEIS can help attract investors who might otherwise be reluctant to back a young business. The company receives funding without the scheduled repayments that come with a loan. Investors may also bring experience, useful contacts and commercial support.

The trade-off is ownership. Before agreeing an investment, founders need to consider the company's valuation, how much of the business they are giving up and the rights investors will have. Choosing people you want involved in the business matters too.

For qualifying investors, the main attraction is 50% income tax relief on investments of up to £200,000 per tax year. Someone investing £20,000 could therefore reduce their income tax bill by £10,000, provided they meet the conditions and have sufficient tax liability.

There are potential capital gains benefits too. Gains on qualifying SEIS shares can be exempt from capital gains tax after at least three years, subject to the income tax relief conditions. Investors reinvesting gains from other assets may also qualify for relief on part of those gains.

These reliefs reduce the financial exposure (RISK), but investors can still lose their money. A convincing business proposition remains essential.

SEIS is designed for young companies with a genuine intention to grow. The main conditions include:

• A UK business presence and a qualifying trade carried on for no more than three years, including any period before that trade was transferred to the company.
• Gross assets of no more than £350,000 immediately before the share issue.
• Fewer than 25 full-time equivalent employees across the company and its subsidiaries.
• No previous EIS or Venture Capital Trust investment.

Profitability itself does not prevent a company qualifying. However, some business activities and company structures are excluded, so eligibility needs checking before offering SEIS investment.

Gross assets means assets before deducting liabilities. The figure needs checking at the investment stage, rather than relying only on the last annual accounts.

A company can raise up to £250,000 through SEIS in total. This is a lifetime limit, rather than an annual allowance. Certain previous grants or state aid can reduce the amount available.

For investors, the ownership rules need particular attention. An investor and their associates, including certain family members, must not have more than 30% of the relevant share capital, voting rights or rights to assets if the company is wound up. Control of the company can also disqualify an investor.

This does not mean founders can sell only 30% of the business altogether. Several unrelated investors can collectively own more than 30%, provided each investor satisfies the rules. Previous holdings and an investor's employment or director status also need checking.

Before completing the investment, companies often apply to HMRC for advance assurance. This is optional, but it can give prospective investors confidence that the proposed investment is likely to qualify.

The application normally includes:

• A business plan, financial forecasts and the latest available accounts.
• The amount being raised and how the money will be used.
• Company ownership details, articles of association and proposed share terms.
• Investment documents and relevant shareholder agreements.
• An explanation of the growth plans and risks to investors' capital.
• Details of prospective investors, normally including names and addresses for a first direct fundraising application.

The documents need to present a consistent picture of the business, its funding needs and the investment being offered.

Advance assurance is based on the information submitted. It does not guarantee each investor's personal eligibility, and relevant changes must be disclosed to HMRC when completing the subsequent compliance process.

Before completion, collect each investor's full legal name, address, contact details and final investment amount. Agree the investment terms in writing and check each investor's eligibility separately. Your advisers can also confirm any identity checks and investor declarations needed for the fundraising.

For a straightforward cash investment, the sequence is to agree the terms, receive the money and then complete the share issue. Qualifying shares must be paid for entirely in cash and fully paid when issued.

The company then completes the necessary approvals, updates its shareholder register, provides share certificates and makes the required Companies House filing. The share issue date matters for tax relief, so the paperwork and timing need to be coordinated.

After issuing shares, the company submits a compliance statement, SEIS1. It can do so once the qualifying trade has been carried on for at least four months or at least 70% of the money from the relevant share issue has been spent.

If HMRC agrees the conditions are met, it authorises the company to issue SEIS3 certificates. Investors use these to claim their relief. Advance assurance alone is not enough.

Relevant qualifying conditions must continue to be met for at least three years, and the money raised must be used for qualifying business activity within three years.

It may be possible to combine SEIS with the Enterprise Investment Scheme, EIS, subject to the conditions for each scheme. For example, a £500,000 fundraising could comprise £250,000 under SEIS followed by £250,000 under EIS.

The order matters: SEIS shares must be issued before EIS shares. Receiving EIS investment first prevents a company from subsequently using SEIS.

We recently helped a profitable young company obtain SEIS advance assurance as part of its plans to fund product development, recruitment and expansion into new markets.

If you'd like to better understand the process and advantages of raising money through SEIS or EIS in your company, book a discovery call with us. We can discuss your plans, whether either scheme could be suitable and what would be involved.