Potential profits and generous tax breaks are a heady brew that tempt many investors to plough cash into start-ups with the Seed Enterprise Investment Scheme.
But it’s easy to ignore the pitfalls that can lie in wait for unwary investors.
Unlike the Enterprise Investment Scheme, which has run for decades, SEIS started in April 2012 and has little or no track record in the way of successful exits or investment managers with a history of significant gains.
That does not make SEIS untouchable, but does mean investors need to exercise caution.
Administering the scheme is one common area where companies can fall foul of the rules.
Issuing the wrong forms to confirm investments can work out costly. SEIS and EIS are similar but a world apart in some respects.
Company secretaries have misfiled SEIS start-ups as EIS schemes or issued EIS shares before those for SEIS.
One rule HM Revenue & Customs applies as supervisor of the schemes is that if relief is applied for EIS, the relief cannot go to SEIS.
It seems a small error, but the difference in tax relief on the ingoing investment drops from 50% for SEIS to 30% for EIS.
Some investors fail to trigger their SEIS income tax relief because the amount is negligible – but that stops them claiming capital gains tax relief or loss relief at a later stage.
Again, this can be a costly mistake.
Keep up with the admin
Keeping on top of the paperwork can be burdensome.
For investors with a string of SEIS investments made through a fund manager that may take months to complete, no tax relief can be claimed if they do not have a Form SEIS 3 from every company confirming that they qualify for SEIS reliefs.
Another one to watch is the tax treatment of gains and losses. Gains are tax-free and loss relief applies to failed investments, but investors cannot offset one against the other.
HMRC will apply tax relief to each individual investment, not across a portfolio, however sensible the outcome might seem.
It’s easy to skimp on the paperwork as an investor but for claiming SEIS tax reliefs, it’s vital to keep on top of the admin.
Find out more about SEIS
You can download a copy of the SEIS Guide here. The guide is divided into a section aimed at investors, and one targeting entrepreneurs. It is the first port of call for those looking to enter into a scheme which has seen incredible growth in popularity in the last few years.
The guide is downloadable from SEIS.co.uk , and provides an easily digestible source of vital information for anybody who could benefit from the scheme.