Seed companies

When it was launched in 2012 the seed enterprise investment scheme (SEIS) was only supposed be available for five years. The good news for entrepreneurs is that in 2014 the government decided to extend the scheme indefinitely. SEIS is specifically aimed at small start-up companies and those who invest in them. One of the key benefits of SEIS is that paid directors can qualify for the generous tax breaks, as long as they don?t own, by themselves or with their spouses, direct descendants or forbears, more than 30% of the company?s ordinary share capital.?In addition, the company must not have been trading for more than two years and must use the investment within three.

Conditions for companies

Your company (with some exclusions – check the SEIS list of excluded trades) can use the SEIS to attract investors by offering them ordinary shares. There?s a limit of ?150,000 on capital raised using SEIS, plus the company must:

• not have traded for more than two years at the time it receives payment for the shares
• have fewer than 25 employees; and
• not have gross assets, i.e. assets before deducting liabilities, greater than ?200,000 ignoring any SEIS investment.

Conditions for investors

Apart from the 30% rule mentioned above there are a few conditions for the investors too. The main ones are that the investor must actually introduce new capital by purchasing the shares with cash. The investor cannot, for example, cancel a debt the company owesThey can?t, for example, be paid for by the investor cancelling a debt the company owes them, e.g. a credit on their director?s loan account. The income tax break is limited to investments up to ?100,000 per year and the shares must be held for at least three years.

Investor tax breaks

The SEIS tax breaks for investors are:

• a credit against their income tax bills, equal to 50% of the amount they invested
• tax-exempt gains made from selling the shares (after three years of ownership or longer)
• capital gains reductions – if a gain is made in the same year as the SEIS shares are issued, it can be reduced by 50% of the investment.

The SEIS time limit

We?ve mentioned the time limits for investors, but there?s also one for your company after receiving the money from investors. Broadly, it has three years from the time it issues the shares to use or allocate the money to a specific purchase. For example, clearing trading debts, expanding its premises or buying new equipment. Investors, including yourself, will want to be sure they qualify for the tax breaks. Therefore, because the SEIS rules are tricky, HMRC offers an advance assurance service which allows you to check your scheme ticks all the right boxes before committing an investment.