The Seed Enterprise Investment Scheme (SEIS Scheme) is designed to help very early-stage companies raise finance by offering tax reliefs to individual investors who buy new shares. It is a government-backed initiative that has played a major role in supporting startups across the UK since its introduction in 2012.
At JPP Law, we do not provide accounting or tax advice on the SEIS Scheme. However, we often advise startups and investors on funding rounds more broadly, so we are well-placed to explain how SEIS fits into the bigger picture of investment. If you require specialist guidance on tax or compliance, we can put you in touch with a recommended accountant who has experience with SEIS applications.
What Is the SEIS Scheme?
The Seed Enterprise Investment Scheme (SEIS) is one of the UK’s four venture capital schemes. It provides generous tax reliefs to investors who are willing to support very early-stage businesses that might otherwise struggle to raise funding.
For companies, it is a way of making investment more attractive by reducing the financial risk for investors. For individuals, it offers the opportunity to support startups while benefiting from valuable income tax and capital gains tax reliefs.
The scheme is specifically aimed at the seed funding stage. This means that businesses are usually just starting out, with little or no trading history, and they need an injection of capital to get off the ground.
How Much Can Be Raised Under SEIS?
Companies can raise a maximum of £250,000 under the SEIS Scheme. This is subject to state aid limits, meaning that the amount must include any other de minimis state aid received in the three years up to the date of the investment.
It is important to note that SEIS funding also counts towards the overall limit for other venture capital schemes, such as the Enterprise Investment Scheme (EIS). In practice, this means that if you plan to raise larger sums later under EIS, your SEIS funding will form part of the cumulative limit.
What are the Benefits for Investors?
Investors in SEIS-qualifying companies are entitled to a range of tax reliefs. These include:
- Income tax relief: Investors can claim back 50% of the cost of their investment against their income tax bill, up to a maximum annual investment of £200,000.
- Capital gains reinvestment relief: If an investor has made a capital gain on another asset, up to 50% of that gain can be exempt from capital gains tax if it is reinvested into an SEIS company.
- Capital gains exemption: If the SEIS shares are sold after at least three years, any gains are free from capital gains tax.
- Loss relief: If the company fails, investors can offset the loss against their income tax or capital gains tax.
These reliefs significantly reduce the financial risk for investors and are the main reason why SEIS has been successful in attracting private capital into early-stage businesses.
Which Companies Qualify?
Not all businesses are eligible for the SEIS Scheme. To qualify, a company must meet specific requirements set out by HMRC. These include:
- The company must be established in the UK and have a permanent establishment here.
- The company must be carrying on a new trade, which has been trading for less than three years at the time of the investment.
- Gross assets must not exceed £350,000 before the share issue.
- The company must have fewer than 25 full-time equivalent employees.
- The business must not already be trading on a recognised stock exchange.
Certain types of trade are excluded from SEIS, such as dealing in land or financial services. It is essential to check that your business activity qualifies before seeking investment.
Which Investors Qualify?
The SEIS Scheme is intended for genuine outside investors, not for people who are closely connected to the company. Investors cannot be employees of the company, although directors are allowed in some cases. An investor cannot hold more than 30% of the company’s shares, voting rights, or rights to assets on a winding up.
These restrictions are designed to ensure that the scheme encourages new investment rather than rewarding existing insiders.
The Application Process
Before issuing shares, a company can apply to HMRC for “advance assurance.” This is an optional step, but it is widely recommended. Advance assurance allows HMRC to review your business plan and confirm that, in principle, your company qualifies for SEIS. Investors usually expect this assurance before committing funds.
Once the shares have been issued and money has been spent in line with the rules, the company can submit a compliance statement (SEIS1 form) to HMRC. If HMRC is satisfied, they will issue compliance certificates (SEIS3 forms) that allow investors to claim their tax reliefs.
The process can take several months, so companies need to plan carefully to ensure funding rounds proceed smoothly.
SEIS and Other Funding Options
For many startups, the SEIS Scheme is the first step on the funding ladder. However, it is not the only option. Once a company has grown and used up its SEIS allowance, it may be able to access the Enterprise Investment Scheme (EIS), which allows larger sums to be raised. Beyond this, businesses may consider venture capital, angel investment, or institutional funding.
The choice of funding route depends on the stage of the business, the amount of money required, and the long-term growth strategy. While SEIS is attractive for very early-stage investment, it is often combined with other sources of capital as the company develops.
Legal Considerations
Although SEIS is primarily about tax reliefs, there are important legal issues to address when raising investment. These include:
- Drafting investment agreements that reflect the rights and obligations of both investors and founders.
- Amending articles of association to ensure compliance with SEIS requirements.
- Managing shareholder rights, including voting, dividends, and exit arrangements.
- Ensuring that any warranties and disclosures given to investors are accurate and legally sound.
At JPP Law, we regularly assist startups with these aspects of funding rounds. We make sure that the legal framework supports growth while protecting the founders’ interests.
Why You Should Seek Professional Advice
The SEIS Scheme offers excellent opportunities, but it also involves strict conditions. Mistakes in structuring an investment or failing to meet the eligibility criteria can result in HMRC refusing to grant reliefs, which can damage relationships with investors.
For this reason, professional advice is essential. An accountant with experience in SEIS can guide you through the compliance process and ensure your application to HMRC is robust. A solicitor (such as JPP Law) can ensure that the legal agreements around the funding round are properly drafted and compliant.
How JPP Law Can Help
JPP Law does not provide accounting advice on the SEIS Scheme. However, we can introduce clients to recommended accountants who specialise in SEIS and related tax matters. At the same time, we can handle the legal side of the funding round, including drafting the necessary documents, advising on shareholder agreements, and ensuring compliance with company law.
Our goal is to give startups the best possible chance of securing investment and building strong foundations for growth.
Speak To JPP Law
If you are considering raising finance through the SEIS Scheme, or if you are an investor interested in supporting a qualifying company, it is important to understand both the tax and legal aspects. JPP Law can guide you through the legal steps and, where needed, refer you to a trusted accountant for specialist tax advice.
Contact JPP Law today to discuss your funding plans and find out how we can support your business at this early stage.
