Seed Enterprise Investment Scheme
Companies and individuals using the Seed Enterprise Investment Scheme (SEIS), fund managers and other promoters and advisers associated with the SEIS should be aware that while new limits and timeframes took effect on 6 April 2023, practically and formally the updates are unable to take place until the Spring Finance Bill 2023 (Finance No2 Bill) reaches Royal Assent and then HMRC make the required updates to IT systems to implement these changes. It is thought that this might be in place by July 2023.
These updates to the SEIS limits were announced in September 2022 and then formed part of the recent Spring Budget announcements. While it is expected that there will be no changes to the bill, so far as SEIS is related, it is worth bearing in mind until it reaches Royal Assent, there is no legal certainty.
SEIS is primarily used by start-ups and young companies to raise early investment. SEIS is one of the venture capital schemes that offers tax reliefs to individual investors. The rules surrounding the scheme for qualifying businesses are stringent and can be found in Part 5A Income Tax Act 2007 and Schedule 5BB Taxation of Chargeable Gains Act 1992. Qualifying businesses only qualify for SEIS if the company:
- carries out a new qualifying trade
- is established in the UK
- is not trading on a recognised stock exchange at the time of the share issue
- has no arrangements to become a quoted company or a subsidiary of one at the time of the share issue
- does not control another company unless that company is a qualifying subsidiary
- has not been controlled by another company since the date of your company being incorporated
The government hopes that by widening access to the SEIS and increasing the funding limits, additional investment and so further supporting the growth of these early-stage companies would be encouraged.
The new changes include:
- The ceiling that applies to the investment a company can raise in the relevant period and on which investors can claim relief - from £150,000 to £250,000.
- The limit that applies at the date of investment on the “gross assets” a company can have - from £200,000 to £350,000.
- The age limit that applies to the definition of a company’s “new qualifying trade” at the date of investment - from 2 years to 3 years
- The annual limits that apply to the investment amount on which individuals can claim income tax and CGT re-investment reliefs - from £100,000 to £200,000
Full risk ordinary shares must be issued and the money raised by the new share issue must be spent within 3 years of the share issue. The money must be spent on either:
- a qualifying trade
- preparing to carry out a qualifying trade
- research and development that’s expected to lead to a qualifying trade — such as a project to make an advance in science or technology
A compliance statement (form SEIS1) must then be sent to HMRC for the shares issued. HMRC then issues a letter of authorisation, a unique reference number and a compliance certificate (form SEIS3) to give to the investor who uses this to claim tax relief at 50% up to the individual investor limit.
HMRC offers ‘Advance Assurance’ whereby they agree that an investment would meet the conditions of a venture capital scheme and provide reassurance to potential investors that investment may qualify for a scheme.
The issue facing small businesses who wish to take advantage of the new rules, either in terms of the extended time frame in which a business can take SEIS investment, or in terms of the amount of investment sought, is that Advance Assurance can only be sought in relation to the old / current rules despite the new rules applying from 6 April 2023, presenting somewhat of a conundrum.
It is worth pointing out that Advance Assurance is not a legal requirement and can still be sought in terms of the current £150k limit. It is therefore possible to gain Advance Assurance if investors require it, but still seek investment up to the £250k limit (with the caveat that the bill may still not be passed into law). This does not assist matters if the company is over the two year limit but within the three year limit after 6 April 2023 though, so it may also be worth considering seeking EIS Advance Assurance at the same time. EIS is another of the venture capital schemes offered for tax relief on investment, with broader rules and less return, at 30% rather than the 50% offered by SEIS (up to the current £100k cap, soon to be £200k). Note, you cannot raise SEIS and EIS shares on the same day, but often in practice both are raised in the same round of funding with SEIS shares issued first, and then EIS shares issued at least one day later.
Posted on 05/03/2023 by Ortolan