James Tillotson of Wellers Accountants explains how SEIS works
For a startup or small business, these are difficult times to raise money. Figures released by the Bank of England portrayed a worrying trend in 2014 with bank lending to Small and Medium Sized Enterprises (SMEs) falling by an average of £500m every quarter. That’s an issue because the recovery has led to optimism. Entrepreneurs and business owners are ready to embrace risk now that there are clear signs of economic growth and opportunity ahead.
The result is many SMEs seeking finance to enter markets and fund growth. Unfortunately UK banks still have a somewhat conservative approach to lending that isn’t befitting of the current tech startup culture that has taken off across the UK, and in London in particular.
The good news is there are plenty of alternative sources of finance available to you. One tax efficient option is to consider taking on investors through the Seed Enterprise Investment Scheme (SEIS). This post explains exactly how it works.
What is SEIS and who does it apply to?
SEIS is a tax break related to investments in small, unlisted companies. It was created for investors who are willing to take on a higher risk profile as part of their investment portfolio. That means funding for early stage businesses such as yours.
To be specific, unlisted companies are those that aren’t listed on a major stock exchange. That’s where the risk part comes in for investors because these opportunities are deemed to be illiquid, meaning it’s difficult to trade shares as there are likely to be very few participants and therefore a low volume of trading activity.
In exchange for taking on this risk investors benefit from tax relief as a means of compensation. That can then make your company a more attractive investment and help you gain access to much needed funding as a viable alternative to traditional sources of finance.
What are the restrictions?
There are specific restrictions around SEIS which include:
- Your company can only receive £150,000 under this scheme
- You have to have been trading for less than 2 years
- The maximum stake an investor can have in your company is 30%
- Your company can only employ 25 or fewer employees
- Your company can only have a maximum of £200,000 gross assets as the time of investment
- You must be preparing to undertake a new trade and not all trades qualify
- Only certain organisations are eligible.
Her Majesty's Revenue and Customs (HMRC) will also run checks to ensure the business hasn’t been set up for the sole purpose of accessing the relief.
How exactly does it work?
Consider the following example. As a business owner, you attract an investment into your company from an individual for £50,000. Through SEIS the government then provide income tax relief to the investor of up to 50% of the value of the money invested.
That then halves your investor’s risk. So they would reduce their income tax liability by £25,000. Should your startup succeed and the investor decides to sell their shares after 3 years, they will then be exempt from capital gains tax on their profit.
If your business fails, then they have the potential option to offset their loss against their income tax. So they could offset their remaining £25,000 against their income tax at whatever rate they pay. That means in the event of failure risk is reduced, while success results in a better return on investment.
Where can I find these investors?
SEIS investors usually fall under three categories:
- Angels – those whose interest is purely with the business, making it succeed by providing their knowledge, skills and network of contacts to the owner with a view of maximising their return on investment
- Family and friends – some of those closest to you might be willing to back and support your venture. It is worth talking to your advisor to ensure they can benefit from SEIS if they’re looking to invest in your business.
- Those who simply want to pay less tax – high net worth individuals looking to mitigate where possible the tax they pay. The danger here is the tax relief is the prime motivator over and above the actual investment opportunity.
There are also various funds set up to support early stage businesses in obtaining this form of funding. These pool money from individuals and institutions with the purpose of investing in a selection of SEIS eligible ventures. They tend to be run by individuals with experience of managing these kinds of companies and performing high level due diligence on potential prospects.
Summary of the benefits to me and my business?
This infographic gives a great summary of what the scheme means for both parties and is taken from the Wellers blog article on how SEIS benefits both entrepreneurs & investors, where you can also download a handy eBook to help you understand a bit more about your investment requirements and how to obtain the funds you need to grow your business.
James Tillotson is a Partner at Wellers Accountants and specialises in providing proactive business advice to help entrepreneurs and business owners realise their goals and ambitions.
Latest from Basics of Business
What do King Kong, a dentist and the Prince of Wales pub have in common?
Posted on 3 April 2017
Choosing a company name is an important early step for any business. It helps to create the first...Learn more
Entrepreneurship - you can't teach that?
Posted on 28 March 2017
In the lead up to the 2016 Olympic Games in Rio the BBC conducted an online public vote that found...Learn more