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The Seed Enterprise Investment Scheme (SEIS) is designed to help small, early-stage companies raise equity finance by offering investors tax-efficient benefits in return for investment. The entrepreneur must be prepared to exchange equity for capital funding.
The Small Companies Enterprise Centre (SCEC) decides if a company and a share issue qualify. If the company, its activities, and shares all meet the requirements of SEIS, SCEC issues the company with a certificate and supplies claim forms for the company to send to its investors, so that they can claim tax relief.
To qualify for SEIS, a company must:
Through SEIS investment, a company can raise no more than £150,000 in total. SEIS investors can invest a maximum of £100,000 in a single tax year. This can be spread over a number of companies. Investors can hold up to a 30% stake in each start-up. No capital gains tax is paid on profits earned on shares held for more than three years. If the SEIS investment makes a loss, the investor will also be able to offset the capital loss against income. HMRC operates an Advance Assurance facility which certifies that at the time of application, the business was SEIS-compliant.
How can you achieve public funding for your innovative start-up business?
Combined with an R&D tax relief claim, you can achieve a large part of your early funding requirements with SEIS. To do this, you will need 4 investors to invest £37,500 each, for a total investment of £150,000. Each will receive a 25% share in the company in return. Under SEIS, each investor can reclaim 50% income tax on their investment through their self-assessment return, regardless of their tax rate. This allows each investor to reclaim £18,750 of income tax relief.
You will then invest the £150,000 in qualifying R&D activities and make your R&D tax credits claim. Many start-up businesses don’t claim their R&D tax credit entitlement, because they think that the scheme doesn’t apply to them, or because they are reluctant to approach HMRC, who administer the scheme. To make the process of claiming your R&D tax credit entitlement easier, it is worth speaking to an R&D tax credits specialist to help you recover up to 33% of your development expenditure. You can benefit from R&D tax credits whether your business is making a profit or a loss. Loss-making businesses can claim an R&D tax credit payable (cash) amount from HMRC, while profit-making businesses can significantly reduce their corporation tax bill. You can then reinvest your tax credit payable or corporation tax savings back into the business to support further development activities.
For a start-up or young small business, combining your R&D tax credits claim with SEIS will result in an even better funding opportunity than R&D tax credits or SEIS alone.