However, many companies are still not aware of the scheme and how it might be able to help them.
The scheme offers tax reliefs to investors in higher-risk companies that are less than two years old, have fewer than 25 employees, have gross assets of no more than £200,000 and have a permanent UK establishment.
One of the key benefits of utilising the SEIS is that it reduces the risk of investing in small, early stage companies – over 50% of which fail in their first year.
Through the scheme investors can invest up to £100,000 in a company in a single tax year rising to a maximum of £150,000 over two or more years. The investments will benefit from 50% income tax relief and any disposal of the shares will be Capital Gains Tax exempt provided the relevant conditions have been met.
A potential disadvantage of using SEIS is that the tax laws are fairly complex – however this is in the process of being simplified.
There are other criteria you must consider before contemplating utilising SEIS:
1. An investor cannot have a substantial interest in the company – this is classed as holding more than 30% of the issued share capital
2. The investor cannot be employed by the Company at any time during the qualifying three year period. Being a director is not, for these purposes, classed as being an employee.
3. The relief on both income tax and CGT can be withdrawn or reduced if the following events occur within three years from the date of issue of the shares:
(i) the investor becomes an employee of the Company;
(ii) the investor’s shareholding becomes a substantial interest in the Company;
(iii) the investor disposes of the shares (except where transferred to a spouse or civil partner);
(iv) the investor receives value from the Company (i.e being repaid for shares held or receiving a loan or benefit from the Company); or
(v) the Company loses its qualifying status.
To take advantage of the scheme, you need to:
1) Seek advanced assurance from HM Revenue and Customs. Whilst this is not compulsory it is advisable.
2) A form SEIS1 has to be completed but cannot be submitted until the Company has been trading for at least four months or has spent at least 70% of the funds invested. If approved HMRC will issue a certificate to the Company together with claim forms (SEIS3) to be supplied to the investors in order for tax relief to be claimed.
If you have started, or are about to start, a new business and you need external funding then it is worth considering SEIS. However, it is always advisable to get professional advice – not only to ensure that you meet all the required criteria but also to ensure that SEIS is the best way forward for your company.
It has many advantages but it is not always right for everyone and once you’re registered as a SEIS company you need to make sure that you continue to fulfil the relevant criteria in order to maintain the tax benefits.
Carol Cheesman is principal of Cheesmans Accountants
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