HMRC SEIS Approval Is No Guarantee For Investors

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Start-ups on crowdfunding platforms try to tempt investors to stake their cash with them by flagging they belong to the Seed Enterprise Investment Scheme (SEIS) – but what does this mean?

SEIS is a tax incentivised investment scheme promoted by HM Revenue and Customs (HMRC) that offers investors some generous tax breaks.

These include a 50% refund on income tax based on cash spent on start-up shares.

For instance, a maximum £100,000 investment returns a £50,000 income tax refund.

Shareholders also pay no capital gains tax on any profits made from investing in the company.

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SEIS qualifying conditions

However, not every start up qualifies for SEIS, which means investors will miss out on the tax breaks.

Entrepreneurs can ask HMRC to pre-approve their business plan so they can advertise that any investment can receive SEIS benefits.

At the tie an investor buys shares, the company must not have:

  • A listing on any stock exchange – but the London AIM and PLUS markets- but not the PLUS-listed markets – do not count under SEIS rules
  • More than 25 employees
  • More than £200,000 in assets
  • Any previous investment from a venture capital trust or the Enterprise Investment Scheme (EIS)
  • Any shares issued that are more than two years’ old
  • Traded other than to carry on the new trade

See the HMRC web site for a fuller explanation of each point

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Losing SEIS tax breaks

Other strict conditions apply as well – for example, the company must be permanently established in the UK.

HMRC will also check that all the money raised by the SEIS funding round are spent on the qualifying business activity within three years of the date the shares were issued.

Buying shares or paying dividends are not considered part of the qualifying activity.

HMRC also has a long list of excluded business activities that SEIS companies cannot undertake.

Investors may still lose their tax breaks with companies that have HMRC pre-approval if the company structure changes during the three-year SEIS term.

HMRC advises investors to read the company’s memorandum and articles as part of their due diligence and to keep a watch for boardroom changes or tax reliefs can be clawed back.

This happened in one of the latest cases before the First Tier Tax Tribunal –  Flix Innovations Ltd v HMRC [2015] TC04710

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