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Issuing equity is a popular way for businesses to raise new long-term finance. However, a stock market listing is unlikely to be suitable for most companies, due to the costs concerned.

From the would-be investor’s perspective, investing in an unquoted company is likely to prove more risky than investing in a listed company. It has been recognised that this type of investment requires encouragement with enterprise initiatives to promote growth.

The enterprise initiatives to encourage growth are the Enterprise Investment Scheme (EIS), the Venture Capital Trust (VCT) scheme and the Seed Enterprise Investment Scheme (SEIS). They are aimed at different sizes and types of business and offer tax relief to the investor.

SEIS is a new scheme and has been introduced to run alongside the other existing schemes. For a company to qualify for SEIS it must have no more than 25 employees and its total assets of the company cannot exceed £200,000.

The main thrust of the scheme is to encourage investment in unquoted start-up companies and it offers even greater tax benefits than EIS.

The scheme is not permanent, but relates to shares issued from 6 April 2012 until 5 April 2017, although this term may be extended by Treasury order. It is only available to individual investors in very small companies, and is not available to investors in partnerships or LLPs.

Common use
For investment in shares in a company by investors who are not connected with the company or its directors. It would generally be made by entrepreneurs, wealthy individuals or friends and family, who provide capital in return for a proportion of your company’s shares.

An individual may invest up to £100,000 per tax year under SEIS from 6 April 2012.

Although the tax reliefs available to a would-be investor are extremely attractive, the rules of the scheme are extremely complicated. If you are intending to raise money under SEIS, taking professional advice from a suitably qualified adviser is essential.

It may be that your business already has potential investors in place, but if you are seeking external investment, the business should produce a prospectus to circulate to brokers who specialise in SEIS (again, requiring specialist advice).

There are three main direct costs that need to be considered:

  • compliance
  • professional advice
  • reporting obligations.

Much of the initial cost will be incurred by the preparatory work. This will include grooming the company, obtaining key staff and having the right management structure in place. A business plan will form the cornerstone of any negotiations.

Legal fees will vary depending on the services provided, the complexity of the business, its size and risk to the lender. Legal costs will also depend on the stage of your business. For example, the business angel may instruct established businesses to complete a due diligence exercise prior to investing.

Fees to prepare management accounts will vary depending on whether other services are provided (such as bookkeeping), and also on the size and complexity of the business, and the frequency of issue.

It is also advisable to have an exit plan for the investor; showing that there is a longer-term plan in place.

For the business:

  • an alternative form of long term finance that would not be available without the tax relief
  • access to equity capital to consolidate or develop the business
  • raising finance in the form of equity strengthens your balance sheet
  • can lead to additional finance being made available from other sources such as banks
  • encourages investment from business angels who can bring wisdom as well as money, such as how to run a successful business or an intimate knowledge of your industry
  • scheme is not subject to the same restrictions on certain types of trade as the EIS scheme, though the trade has to be new.

For the investor:
The main advantages of SEIS for the investor comes in the form of the generous tax reliefs available. SEIS offers four tax reliefs in one and covers both income tax and capital gains tax. The reliefs available are as follows:

  • income tax relief: the investor may invest up to £100,000 (combined maximum for EIS and VCT investment) in a tax year and obtain a tax reducer of 50% of the amount of investment
  • capital gains tax exemption: if the investor has received income tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for at least three years from the date of issue of the shares (or three years from the date of commencement of the qualifying trade, if later), then any capital gain on the disposal of the SEIS shares will be exempt from capital gains tax
  • capital gains tax deferral: capital gains realised on the sale of any asset from 2012/13 onwards may be deferred against investments through SEIS; the gains crystallise when the SEIS investment is disposed of
  • loss relief: if the shares are disposed of at a loss, you can elect that the amount of the loss, less any income tax relief given, can be set against income from the year in which they were disposed of, or any income from the previous year, instead of being set off against any capital gains.

The scheme rules are complex and there are strict criteria to be met by both the business and the investor.

Qualifying investors:

  • the investor must not be ‘connected’ with the company. For the purposes of establishing whether an individual is connected with a company, a 30% test applies. If an individual, together with his associates, holds more than 30% of the share capital, loan capital, voting rights or rights on winding-up, they will be 'connected' and therefore not eligible for relief under the scheme. 'Associates' are any partner or relative of the investor and, in certain circumstances, trustees and personal representatives of trusts/estates in which the investor was either settler or had an interest
  • irrespective of the 30% test, an individual is connected with the issuing company if he, or any associate, is an employee or partner of the issuing company or any of its subsidiaries at the time of issue
  • an individual is also connected with the issuing company if he is a director (unless unpaid) of that company or of a subsidiary or partner of that company. Business angels, who have had no previous connection with the SEIS company, may receive a 'reasonable remuneration' for their services as a director
  • investors cannot claim tax relief until the company has spent at least 70% of the money invested
  • the individual must not be an employee of the company from the date of incorporation of the company until at least three years following the issue of the shares. A director is not an employee for this purpose
  • the investor must not have a ‘substantial interest’ (more than 30% of the ordinary share capital or votes) and there are anti-avoidance provisions where there are pre-arranged exits or loan arrangements
  • the investment must be in cash and must be invested in shares which are fully paid when issued. The shares cannot carry a preferential right to dividends, to assets on a winding up, or to redemption. These shares must be held by the investor for three years after issue. There will be a claw back of relief if the shares are not held for the requisite period.

Qualifying companies:

  • the company may raise no more than £150,000 in SEIS finance
  • the rules start to get really complicated when looking at the requirements for a qualifying company. Outlined below are an 'in a nutshell' version of the main rules, which run to many pages of legislation.

For shares to be eligible for SEIS relief:

  • the company must be a new company, incorporated within the two years prior to the issue of the shares
  • the shares must be issued in order to raise money for a new trade and the cash raised must be spent within two years following issue
  • the total of SEIS investments must not exceed £150,000
  • the company must exist for the purpose of carrying on one or two new qualifying trades
  • the company must have a permanent establishment in the UK and its shares must be unquoted
  • the company cannot be part of a group and must not be a member of a partnership or similar entity
  • the total value of the company’s gross assets must not exceed £200,000 at the time of issue. If there is a related company the relevant proportion of the assets must be included in this total
  • the total full-time equivalent employees must not exceed 25 at the time of issue; employees include directors for this purpose
  • there must be no EIS or VCT investment in the company before the SEIS shares are issued.

Other options
SEIS facilitates the raising of long term equity capital for businesses, with attractive incentives for the investor.

The right type of finance for your business section of this website gives examples of financial structures that are suitable for different trading types and sizes of business.

Loans are a common form of finance, like trade credit and overdraft facilities. There are different types of loans available including mortgage and offset facilities. A loan can be used alongside a hedge or an interest swap, for example, to ensure that the cost of the loan is suitable for the business needs. For short-term problems, such as managing your cashflow, an overdraft or business credit card may be more suitable options.

Where loans are used to finance assets, hire purchase or leasing should also be considered.

Last updated: 17 Oct 2012