A guide to SEED EIS and how it can help fund your start up

A guide to SEED EIS and how it can help fund your start up

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Date13 Jun 2016
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Posted ByAdmin
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Researchers say that 8 out of 10 small businesses close within the first 2 years of trading.  A massive 80% crash and burn!

But why?

The main contributive factor for this is due to insufficient cash-flow as a result of the following:

  • Not considering high initial start-up costs
  • Periods of Low or Zero income during the establishment period
  • Failing to consider their own personal financial obligations.

Running out of money is a result of poor planning. As a business, there are various funding options available to you.

The Conventional ones

  • Bank loan
  • Over draft
  • Hire-purchase agreements
  • Personal finance

For the first three listed above, you will have ongoing maintenance payments so may not be ideal for some new companies.

There are other alternative funding options. For example:

  • Investors / Business angels i.e. Angels Den
  • Crowdfunding
  • Factoring/Invoice financing

Most of the above options will insist on receive profitability and cash-flow forecast.

Those interested in the investor route may want to consider the government backed Seed Enterprise Investment Scheme to make their company more attractive to investors.

History of SEIS

The Seed Enterprise Investment Scheme (SEIS), introduced in the Chancellor George Osborne’s 2011 Autumn Statement, is a tax-friendly financing scheme allowing start-ups to find a route to equity finance. It offers great tax efficient benefits to investors in return for investment in small and early stage start-up businesses in the UK. 

Some benefits for investors:

  • Receive 50% tax relief on initial investment as long as investment doesn’t exceed £100,000 per tax year
  • Allowed to carry back the tax relief to the prior year
  • CGT gains release where 50% of gains are treated as exempt but the investor must invest 100% of the investment. Unusually, this will apply to any asset, including Residential Property.
  • Disposal relief:  no CGT on the SEIS shares as long as they have met the minimum 3 year holding period requirement

SEIS eligibility criteria

As with all tax schemes, the following criteria must be met by the company.

  • Company must be unquoted (not listed on the Stock Exchange)
  • Company must be independent
  • Company must have less than 25 employees
  • Company must be a new business, less than 2 years old
  • Company must have less than £200,000 in gross assets (before the investment)
  • Overall SEIS investment must not exceed £150,000
  • Company must not have previously raised money under EIS or venture capital trust (VCT) schemes.

Excluded trades

Most trade like Retail and Health & fitness qualify. However, the company must also not be an excluded trade. Some examples:

  • Financial activities
  • Legal and accounting
  • Property development
  • Farming
  • Dealing in land and shares
  • Nursing homes
  • Operating hotels

There are additional excluding trades and a list can be found here: https://www.gov.uk/guidance/seed-enterprise-investment-scheme-how-companies-qualify.

Investors criteria

Investors must meet some criteria in order to qualify for the benefits received through investing via SEIS. They are the following:

  • Investor must be over 18
  • Investor must not have a substantial equity stake in the company. 30% or less
  • Investor must hold shares for minimum of 3 years
  • Company must remain compliant with SEIS
  • SEIS can’t be use to avoid tax
  • All shares must be bought in cash or paid in full
  • The investment must not be financed by loan

When determining if the investor has more than 40%, associated persons must be included. For the purpose of associated people the following would apply:

  • Spouses/Civil partner
  • Grandparents, Children, Parents, Grand children
  • Business partners (For this purpose it would only include people in partnership)
  • The investor may not be employed by the firm, unless as a director

Summary:

People with existing businesses can start new companies for new ventures that they might have as long as the trade isn’t the same as the previous organisation. There are various rules to consider before you can apply with the SEIS scheme. It’s recommended you speak to us before setting up any companies as the business owners may be entitled to SEIS tax relief on their shareholding if they structure the setup correctly.

Those businesses that wish to know more, we recommend you setup a half-hour free consultation with ourselves either in person or over the phone.