The Seed Enterprise Investment Scheme (SEIS) offers significant tax incentives to investors, making it a compelling option for those looking to fund early-stage businesses.
However, these tax benefits come with conditions that need to be met on both the side of the investor and business in order to qualify. These same conditions should also be sustained to maintain the tax relief.
This means that despite qualifying initially, SEIS tax relief can be revoked within three years of the share issuance, should invalidating circumstances occur.
To help you avoid potential pitfalls, let’s dive into some common scenarios where SEIS relief can be rescinded, and what you can do to stay on track.
One key qualifying criteria for SEIS is that a company must not be—or never have been—controlled by another company. This must be sustained for the three-year qualifying period. This means the company must maintain >50% ownership throughout.
If, for example, a co-founder departs within the three-year qualifying period, their shares may be reallocated. If this causes a corporate entity to gain a majority stake in the company, SEIS would be revoked.
Founders and investors should continue to monitor ownership structure after securing investment, to ensure the company control clause is not breached.
Investors must hold their shares for three years from the date of issue in order to benefit from the full tax relief on offer through the scheme. Should an investor sell their shares within this three-year period, they will forfeit part, or all, of their income tax disposal relief.
If they make a profit on the sale, they also will not benefit from the capital gains tax (CGT) relief.
Loss of relief won’t be triggered when the shares are sold to a spouse or civil partner.
SEIS funds must be spent within three years of the share issuance date. Additionally, the funds must also be used for the qualifying business activity that was specified during the fundraising process.
For example, imagine you have allocated funds for the development of a shop floor, but face delays due to contractors that run beyond the three-year period.
It does not matter that the funds remain allocated to that purpose—they have not been spent. This jeopardises the tax reliefs for investors.
To mitigate this risk, you should:
For SEIS to be valid, the shares issued must be ordinary shares, fully paid in cash at the time of subscription, and with no preferential rights.
Share rights become preferential if they are prioritised over the rights carried by another share class.
Common issues include:
For SEIS compliance, the shares issued must carry equal risk to all shareholders. A company with one class of shares typically avoids these issues, and introducing new share classes, especially ones with preferential rights, could disrupt compliance.
It is crucial to consider how newly introduced shares will interact with existing SEIS shares, to avoid jeopardising the tax benefits.
Investors do not qualify for SEIS tax relief if they hold more than a 30% stake in the company—this also extends to certain family members.
If the investor, or their spouse, parents, children, grandchildren, or grandparents gain more than a 30% ownership stake, or become employed by the company, the SEIS relief is invalidated.
This applies beyond the initial investment period, and is a factor to be mindful of as the business and investor relations develop over time.
The business must carry out a qualifying trade for at least three years after the initial investment is made. If more than 20% of the company’s activities shift to excluded sectors—such as financial services or property development—investors may lose their tax benefits.
Many businesses, particularly those in earlier stages of development, will shift their focus significantly. If a pivot is on the cards, it is always worth keeping the SEIS guidelines in sight in order to uphold the tax benefits.
Essentially, you should ensure that the business plan aligns with the one sent to HMRC as much as possible, in order to maintain compliance.
SEIS relief can be rescinded if a company no longer classifies as ‘trading’, due to insolvency or liquidation. This applies if a resolution is passed, or a court order is made for the winding up of a company, or if the company is dissolved.
However, all is not lost! If the company can prove that this happened for genuine commercial reasons—most commonly, insolvency—SEIS tax relief is not withdrawn.
Proper documentation and clear communication with HMRC are required to prove that the dissolution of the company was commercially motivated.
Investors must claim SEIS income tax relief within 5 years (from the 31st January following the tax year in which the investment was made) in order to benefit from CGT relief. Failure to do so can lead to unintended tax liabilities.
This is irrespective of whether you have any other taxable income—you must make your SEIS income tax relief claim.
The tax advantages of SEIS can be transformative for investors and businesses alike. However, in order to receive such benefits, you must continually stay within the eligibility criteria HMRC set.
Whilst some may offer a degree of flexibility and nuance, others are cut and dry, and so being mindful of the ways in which relief can also be lost is key.
Some key ways to maintain compliance:
By understanding and navigating these potential pitfalls, you can avoid costly mistakes and leverage the schemes to their full potential!
Unsure if you’ll qualify for SEIS? Take our SEIS eligibility quiz to learn more.
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