The temporary scheme will run until 2017
Anyone who has been involved in tax for a while may be forgiven for thinking that the Seed Enterprise Investment Scheme (SEIS) bears more than a passing resemblance to the old Business Start Up Scheme that mutated into the Business Expansion Scheme, now the basis for the Enterprise Investment Scheme (EIS).
SEIS is not there to replace the EIS, but to run alongside that and the Venture Capital Trust (VCT) regime.
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 available only to individual investors in very small companies, and is not available to investors in partnerships or LLPs.
The investment limit for a qualifying individual in a fiscal year is £100,000; however, they cannot claim tax relief until the company has spent at least 70 per cent 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 per cent 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 that are fully paid when issued. Shares cannot carry a preferential right to dividends, to assets on a winding up, or to redemption and 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.
The income tax relief is 50 per cent and any gain will be exempt, provided that the investor (or spouse or civil partner) held the shares for the three years following the issue.
In the case of a spouse or civil partner receiving the shares from the original investor, it is the recipient who will be charged to tax on any claw back on a disposal.
Note that a gain will be completely exempt, compared with the existing EIS scheme, which only offers a deferred gain, although for EIS there is no limit to the amount of gain deferred. The rate of income tax relief for an existing EIS scheme is only 30 per cent.
The company will have to consider its funding options as it will be able to raise EIS or VCT finance after a SEIS initial finding, though not until the company has spent 75 per cent of the SEIS monies available.
However, SEIS will not be available if EIS and VCT funding regimes have already been utilised.
Companies considering using the Seed Investment Scheme (SEIS) have the option to obtain advance assurance or formal clearance from HMRC's Small Company Enterprise Centre (SCEC).
Before giving the assurance, HMRC will consider if the company will be a qualifying company carrying out a qualifying business activity, if the shares will be eligible shares and if the money raised will be used in a manner which satisfies the rules of the scheme.
If the company wishes to rely on an assurance, the onus would be on the company to provide all relevant information drawing attention to any particular issues which could mean that the company may not meet the requirement of the scheme when the shares are issued.
Full guidance on the advance assurance application can be found on the HMRC website, which can be accessed via the 'Related links' section on this page.
Other proposed changes to the EIS and VCT regimes are:
There will also be a new disqualifying purpose which will disqualify shares that ‘are issued subject to arrangements whose main purpose is to generate access to the reliefs in circumstances where either the benefit of the investment is passed to another party to the arrangements, or the business activities would otherwise be carried on by another party’.
This is aimed at limited-life arrangements, which have been popular within VCT.
For more information, visit the 'Related links' section on this page.