Investors can earn some significant tax breaks by investing in new start businesses via the government’s flagship Seed Enterprise Investment Scheme (SEIS).
But those tax breaks are at risk if companies or investors break the SEIS rules.
Here’s a quick guide published by SEIS.co.uk to help less experienced investors watch for warning signs that something maybe going wrong.
Know the SEIS rules inside out
HMRC publishes the scheme rules online – follow this link for some advice from the tax man about SEIS investment.
Pay for the shares
According to HMRC, the most common way a SEIS company breaks the scheme rules is by not collecting payment for SEIS shares from investors. The tax man suggests SEIS shares are not issued on incorporation, but once the company is registered and has a bank account, so shareholders can transfer their cash online.
Collecting more than £150,000 equity funding
SEIS companies can raise £100,000 in their first funding round and up to an additional £50,000 in further funding rounds.
If the investments breach these thresholds, then investors are at risk of losing their tax breaks.
If the ceiling is exceeded in round one, then the company is outside of SEIS and no investors receive their tax breaks. If round one stays within the limit, but later funding rounds exceed the £150,000 threshold, the existing investors keep their tax breaks, but the new ones do not qualify for SEIS.
Changing qualifying trades
HMRC publishes a list of trades that do not qualify for SEIS tax breaks online. If a company switches to one of these trades during the three-year SEIS investment term, the directors must tell the tax man.
HMRC can go back to the investors and demand repayment of any tax savings.
If the company changes trades after the three-year term, the tax breaks no longer apply, so it’s unlikely HMRC will chase investors for the return of any money.
Shareholder agreement
SEIS started in April 2012, so no company has run inside the scheme for the full three-year investment term yet.
That means equity investors have no precedents to measure their SEIS input against.
To guard against the directors making business decisions that put SEIS tax breaks at risk for investors, it’s sensible to have a shareholder agreement that clearly lays out the terms of the investment and entitles the investor to a place on the board.
Interesting, simple to understand article. And raises important points for investors in any SEIS vehicle to be aware of.
However it’s incorrect to say “SEIS companies can raise £100,000 in their first
funding round and up to an additional £50,000 in further funding rounds.” The legislation says nothing about rounds and this statement makes it sound like companies have to raise £100,000 before they can raise the final £50,000 – not so. It is right that companies don’t have to raise the full £150,000 SEIS limit in one go (provided their gross assets don’t exceed £200,000 at the outset and £350,000 at the point that the full £150,000 has been raised) but that is as far as the legislation goes.
Obviously sites like these are frequented by potential investors in SEIS vehicles so perhaps you would consider amending that section of your otherwise terrific article? Unless you can point to the HMRC guidance which says that you’re right and I’m wrong of course!