How to use the Seed Enterprise Investment Scheme to attract investment
William Berry takes a closer look at the tax-efficient government scheme to increase investment into new businesses
With around 500,000 business start-ups in the UK – a proportion of which will seek equity finance – entrepreneurs have to think about attracting investor cash by becoming the most investable business around.
In order to become investable, you have to think like an investor; where would they go to look for business opportunities and what do they want out of the investment are probably two main questions.
Increasingly the answer to the first question is crowdfunding platforms. As crowdfunding and crowd investing sites spring up all over the place, investors are spoilt for choice when it comes to the type of business they can invest in – everything from office storage companies to Mexican tortilla chips makers are vying for cash.
Signing up to a crowdfunding site is a great way to get your business message out there and raise its profile and some sites even link-up investors and business to allow skills, as well as money, to be exchanged.
This means your company could benefit from not just a cash injection but also the expertise of anything from a marketing guru to a financial whizz.
What do investors want?
When picking a crowdfunding site, it is worth thinking about the answer to question number two; what do investors actually want out of their investment.
You may think the answer is pretty simple: they want a return on their cash and to hopefully invest in the next Facebook and become millionaires.
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While that is the dream of some investors, a large number of them are already wealthy and are also looking for a tax-efficient investment on top of the chance to make a return.
Having maxed out other tax advantages such as filling up their ISA and paying the maximum into their pension for the year, they need to think about where they can shelter their money.
This is where crowdfunding sites come into their own. They offer investors the chance to put their money into a start-up while taking advantage of some considerable tax breaks.
The Seed Enterprise Investment Scheme (SEIS)
These tax breaks come mainly in the form of the Seed Enterprise Investment Scheme (SEIS). These were launched in 2012 by the government to try and kick-start investment in small companies.
They offer fantastic tax breaks, the biggest of which is 50% income tax relief on the investment; so if someone invests £10,000 they automatically receive £5,000 back in relief.
On top of that there is capital gains tax and inheritance tax benefits that could in total mean tax breaks totalling 80% on the investment.
SEIS was designed with small businesses in mind and the government is very keen to make it a success. At the end of last year it asked crowdfunding platform Crowdcube to explore ways to make the application process for SEIS better as part of its Red Tape Challenge in which it is trying to make life easier for companies – much to the relief of the company owners.
Qualifying for SEIS
If you want to allow investors to put money into your business in this way then you have to ensure the business is no more than two years old, there are less than 25 employees and assets owned by the company are less than £200,000.
This means that pretty much all start-ups would be approved and although investors are only allowed to invest a maximum of £100,000 in using the SEIS each year that sum of money is probably more than enough for most small businesses.
Offering equity in your business is all well and good but adding a number of tax breaks through the SEIS wrapper is an added, but potentially very lucrative, bonus for those who are willing to chance their hand on a small business.
You just have to make sure that small business is yours.
William Berry is a serial entrepreneur and in 2006 was named a Young Gun by Growing Business. He is the founder-director of accommodationforstudents.com, and Vincentbond.com. William is also CEO of the new video start up p6.com, based in California.