SEIS – Form SEIS 1 and guidance published
On 3 October, HMRC published form SEIS 1 (along with an accompanying guidance note) which a company must use to apply for formal approval before investors can claim tax relief under the Seed Enterprise Investment Scheme.
SEIS was introduced for a five year period effective from 6 April 2012. It is targeted at early stage companies wishing to raise funds of up to £150,000 and is expected to be used as a precursor to EIS and VCT investment.
The guidance note provides an overview of SEIS. It does not cover the finer detail so practitioners may need to take further advice especially where there is doubt over the qualifying conditions which mirror in many instances the complex rules for investment in EIS.
An outline of the scheme is as follows:
Tax reliefs available
Income tax relief is available to individuals who subscribe for qualifying shares in a company which meets the SEIS requirements. Investors are entitled to income tax relief at 50% (regardless of the individual’s own tax rates) on a maximum of £100,000 in any one tax year. Relief is given as a tax reducer.
There is a “carry-back” facility which allows all or part of the cost of shares acquired in one tax year (not before 2012/13) to be treated as though the shares had been acquired in the proceeding tax year.
If income tax relief has been received on the issue of shares and these are held for at least three years from that date (known as period B), any gain on disposal of the SEIS shares is free from CGT.
For 2012/13 only, capital gains on any assets sold in that year which are reinvested in shares which qualify for SEIS income tax relief, will be exempt. Both the £100,000 limit and the carry back facility also apply to the CGT re-investment.
Investment and investor requirements
The shares must be subscribed for in cash and fully paid up at the time of issue. Subject to strict conditions, the shares may carry limited preferential rights to dividends but may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up.
The shares must be issued for the purpose of raising money for a qualifying business activity carried on by the company or a qualifying 90% subsidiary and all monies raised by the share issue must be spent for the purposes of a qualifying business activity within period B. Where an insignificant amount is unused or used for different purposes this will not disqualify the individual from obtaining the relief.
The company which must be UK resident or have a permanent establishment in the UK must be unquoted at the beginning of period B and it cannot control a company that is not a qualifying subsidiary. During the period from the date of incorporation to three years after the issue of the shares (known as period A) the company cannot be under the control of another company or another company and a connected person.
The company must exist wholly for the purposes of carrying on one or more new qualifying trades – taking its meaning from the EIS rules – which does not consist wholly or substantially of excluded activities.
At the time the shares are issued, the parent company must have no more than £200,000 in gross assets and, along with its subsidiaries, engage less than 25 full time equivalent employees.
Neither the investor nor any associate of the investor can be an employee throughout period B but a director is not an employee for these purposes.
The investor cannot have a “substantial interest” in the company throughout period A. Substantial interest is defined as owning more than 30% of the ordinary share capital or the issued share capital or the voting of the company or any subsidiary or more than 30% of the assets on a winding up. Brothers and sisters are not treated as associates for SEIS purposes but spouses and civil partners, parents and grandparents, children and grandchildren along with business partners and trustees or certain trusts will be included.
The investment must be made for genuine commercial reasons and not as part of tax avoidance arrangements.
Relief withdrawn or reduced
Relief will be withdrawn or reduced at any time during the three years from the issue of shares if:
- The investor becomes an employee of the company;
- The holding becomes a substantial interest in the company;
- The company loses qualifying status;
- The investor receives value from the company;
- The shares are disposed of.
Form SEIS 1 cannot be submitted until either the company has been trading for four months or, if not yet trading, has spent at least 70% of the monies raised by the relevant share issues.
Although the investment limits are disappointedly low the introduction of SEIS will provide smaller companies an opportunity to attract investment and secure vital funds at the outset of business which may not be available from more traditional routes such as a bank. However like most valuable reliefs there are a myriad of qualifying conditions which have to be satisfied and potential pitfalls await those how do not comply.