Raising equity funding through SEIS

The Seed Enterprise Investment Scheme (SEIS) is a great way for start-up and fledgling tech businesses to raise equity funding.

Under SEIS, tech start-ups can benefit from a cash injection of up to £150,000 in total – and £100,000 in any single tax year.

This type of funding is attractive for small companies because, unlike bank debt, there are no interest payments to make. The company issues shares to investors in return for their cash. In addition, SEIS funding may be available to start-ups when bank debt is not – perhaps because the business has no trading income yet and is still in its development stage.

Tax breaks for investors

SEIS recognises that start-ups and fledgling business can struggle to raise funding – because they may be seen as more risky investments – so it offers attractive tax breaks to investors. For example, SEIS investment attracts income tax relief at the rate of 50%: for every £1,000 an investor puts in, the investment will only cost them £500. As long as investors hold onto their shares for at least three years, any capital gain they make on their investment will be tax free.

Another incentive for investors is that when a SEIS cash injection is made from a gain on the sale of other assets, 50% of that gain will be free from capital gains tax.

Small companies only

Not every business qualifies for SEIS funding. Tech start-ups should meet the requirements in terms of the type of eligible trade. For SEIS, they should be under two years old. (Longer established companies – generally up to seven years old – could look at using the Enterprise Investment Scheme.) SEIS companies also need to have less than 250 employees and gross assets of no more than £200,000.

Moore Stephens can seek Advance Assurance from HMRC that a company will be eligible for SEIS before any investment is made. This gives potential investors valuable peace of mind that they will be able to benefit from the attractive tax reliefs.

Potential tax traps

SEIS investors can include some family members, but not all. If you’re the director of the business, your brothers and sisters could invest through SEIS, but not your spouse, parents or children.

Another potential tax trap is that investors who are married will be treated as a single investor when determining their eligibility for the SEIS tax reliefs, as will business partners. This is important because if an investor’s shareholding in the company exceeds 30%, the SEIS tax reliefs are lost. A husband and wife, therefore, must make sure their total shareholding does not cross the 30% threshold.

It’s also important to remember that SEIS investors cannot be employees of the company. If a friend or family member wants to be actively involved in the business, then SEIS investment is not for them. Your SEIS investor could offer expertise and advice, but not as an employee involved in the day-to-day running of the business.

Tech start-ups may be anticipating a number of fund-raising rounds, beginning with SEIS funds, then EIS funds and then additional equity injections. The key to remember is that the shares issued to the early stage investors – the SEIS and EIS investors – must not have any preferential rights attached.

A final trap that SEIS businesses can fall into is that they forget to issue the shares and provide the investors with their share certificates. Unless this final step is completed, even if all other requirements are met, the SEIS tax reliefs will be lost.

To find out more about the ways to raise equity funding at an early stage that is attractive for your investors, please contact Nik Shah.

Tech start-up looking to grow?

Click here to find out more about Hatched, our two year programme designed to support tech start-ups throughout the rapid growth phase.

Applications to join Hatched are now open, and will close on Friday 27 October 2017. To register your interest click here.

 

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