Advice to companies and investors about how to make sure investments qualify for Seed Enterprise Investment Scheme relief.
You are required by law to tell your tax office within 60 days of any of the below events occurring.
Shares must be paid up in full, and in cash, when they are issued.
Please note: one of the most common reasons for investments failing to qualify for relief under Enterprise Investment Scheme (EIS), which may also apply to Seed Enterprise Investment Scheme (SEIS), is that shares are issued to investors without the company having received payment for them. This sometimes happens when a new company is registered at Companies’ House and shares are issued to members as part of the registration process, but the company takes some time to set up a bank account and the shares are not paid for until that has happened.
HM Revenue and Customs (HMRC) would advise companies and investors to ensure that any shares on which it is intended SEIS relief will be claimed, are not issued during the company registration process but are issued only at a later date when the company is able to receive payment for them.
Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up. Shares may carry limited preferential rights to dividends, but may not include rights where:
- The rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. (Please note: this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so.)
- The right to receive dividends is ‘cumulative’ - that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it at a later time, normally once funds become available.
There must be no arrangements:
- to protect the investor from the normal risks associated with investing in shares
- at the time of investment, for the shares to be sold at the end of the relevant period
- to structure a company’s activities with the main purpose of allowing a party other than the company to benefit from the tax advantaged finance which the scheme is intended to incentivise or where those activities have no commercial purpose other than to generate tax relief (either at time of issue of the shares or later)
As an investor you may be eligible for tax relief providing:
- you have subscribed for shares which have been issued to you and which at the time of issue were fully paid for, you may subscribe via a nominee
- you do not have a ‘substantial interest’ in the company, at any time from date of incorporation of the company to the third anniversary of the date of issue of the shares - ‘substantial interest’ is defined as owning more than 30% of the company’s issued share capital or of its voting rights or of the rights to its assets in a winding up - shareholdings of associates are taken into account in arriving at the 30% (‘associates’ include business partners, trustees of any settlement of which the investor is a settlor or beneficiary, and relatives - relatives for this purpose are spouses and civil partners, parents and grandparents, children and grandchildren, brothers and sisters are not counted as associates for SEIS purposes)
- you are not employed by the company at any time during the period from date of issue of the shares, to the third anniversary of that date, for this purpose, you are not treated as employed if you are a director
- the shares may not be acquired using a loan made available on terms which would not have applied other than in connection with the acquisition of the shares in question
- the shares must not be issued under any ‘reciprocal’ arrangements, where company owners agree to invest in each other’s companies in order to obtain tax relief
When relief will be withdrawn or reduced
‘Tax relief’ in this section means both Income Tax relief and capital gains re-investment relief.
HMRC will withdraw tax relief if, at any time during the 3 years from date of issue of the shares if:
- you become employed by the company without being a director of the company
- your holding in the company becomes a ‘substantial interest’ (see investor requirements above)
- the company loses its qualifying status
Tax relief will be either withdrawn or reduced if at any time during the 3 years from date of issue of the shares:
- you dispose of any of the shares (other than to a spouse or civil partner - in those circumstances the shares are treated as though the spouse or civil partner had subscribed for them)
- you or an associate receive ‘value’ from the company, or from a person connected with that company
The rules to do with receiving value from the company are similar to those for EIS, which are available in the Enterprise Investment Manual. It can include the company repaying any of its shares or securities which you hold; repaying a debt owed to you, if that repayment is in connection with the issue of shares; you receiving a loan or benefit from the company; or the company selling an asset to you at less than market value (or you selling an asset to the company at more than market value). How much tax relief is withdrawn will depend on the amount of the value received. Insignificant amounts of value received can be ignored, and there is also scope for relief to be retained if the value received is made good by the investor as soon as is practicable.