Seed Enterprise Investment Scheme (SEIS): what you need to know

For early-stage businesses with an ambition to grow with seed funding and pre-seed funding, the Government’s Seed Enterprise Investment Scheme (SEIS) is a great opportunity to raise early investment, attract risk-taking investors, and give your startup a solid financial boost.

For years, Startups has been helping small businesses understand funding options, so that founders can make informed decisions, secure the right investors, and give their business the best chance to grow.

If you’re dreaming big and looking for ways to take your startup to the next level, then the SEIS could be your ticket to getting things off the ground.

In this guide, we’ll break down what SEIS means, its pros and cons, eligibility requirements, and how to apply, giving you everything you need to decide if it’s the right funding route for your business.

What is the Seed Enterprise Investment Scheme (SEIS)?

The Seed Enterprise Investment Scheme (SEIS) is a government-backed initiative that helps startups and early-stage businesses secure business funding, giving them access to vital capital and allowing them to benefit from the expertise and guidance of experienced investors.

It is also designed to attract angel investors and venture capitalist (VC) firms who are willing to take a risk on promising startups by rewarding them with generous tax incentives. Businesses can receive a maximum of £250,000 through the scheme.

SEIS shouldn’t be confused with EIS (Enterprise Investment Scheme). While both offer tax relief to investors, they target different stages of a company’s growth. Unlike SEIS, which is for very early-stage businesses, EIS is for more established companies (usually trading for less than seven years). The amount you can get is higher as well, as it offers up to £5 million in funding for each year.

How does it work?

A very early-stage company can apply to HMRC for SEIS “advance assurance”. This reassures investors that their investment will qualify. To be eligible, the business must be trading for less than three years, have under £350,000 in gross assets, and employ fewer than 25 people.

Once approved, angel investors, VCs, or even family and friends, can invest up to £200,000 per tax year under SEIS.

Advantages of the SEIS scheme

SEIS comes with some great perks for startups trying to get early investors on board. The main benefits are:

1. Easier to raise money

Being approved for SEIS means that investors are more likely to back you because the tax breaks reduce their risk. Moreover, being able to raise up to £250,000 when you’re just starting out can help give your startup the early funding it needs to grow and get off the ground.

2. Flexible use of funds

The money raised from SEIS can be used toward key growth areas for a business, such as hiring employees, developing and refining products, or driving marketing campaigns to reach new customers. It gives founders the freedom to allocate funds where they’ll have the best impact.

3. Government-backed stamp of approval

Being approved for SEIS can make your business more credible. This is because it shows investors that you meet certain standards, which can help build trust and confidence when you’re raising early-stage funding.

How is SEIS beneficial for investors?

With SEIS, investors can receive 50% income tax relief on the amount invested. For example, if someone invests £20,000 into a business, they can knock £10,000 off their income tax bill.

Additionally, if a business fails, investors can reclaim some of their investment by offsetting the loss against their income or capital gains tax. This makes investing in early-stage companies less risky and can encourage investors to take a chance on your business.

Disadvantages of SEIS

While SEIS comes with obvious advantages, it’s not without its downsides. Here are some key disadvantages to keep in mind before deciding if it’s right for your startup:

1. Comes with strict rules

Not every early-stage business will be eligible for SEIS. As mentioned earlier, your company must be less than three years old, have under £350,000 in assets, and employ fewer than 25 people. Also, even the maximum of £250K might not be enough if you need a bigger seed round.

2. Administrative burden

SEIS isn’t something that you can get straight away. You’ll need to apply through HMRC for advance assurance and keep on top of the paperwork, which can take some time and effort. It’s not huge, but it’s something to be prepared for when you’re setting things up.

3. Not for every investor

It’s important to note that SEIS only applies to UK taxpayers. This means that only UK-based investors can claim the tax relief, which can limit your options for potential backers. Keep this in mind if you’re hoping to attract international investors.

Am I eligible for SEIS?

Aside from the requirements mentioned earlier, there are other key criteria you’ll need to meet to be eligible for SEIS.

According to Gov.uk, you can apply for the scheme if your business:

• Carries out a new qualifying trade
• Is established in the UK
• Is not trading on a recognised stock exchange at the time of the share issue
• Doesn’t have plans to list on the stock market (become a quoted company) or become a subsidiary of another company
• Doesn’t control another company, unless that company is a qualifying subsidiary
• Hasn’t been controlled by another company since the date of your business incorporation

It’s also important to note that you cannot use the SEIS if you’ve already received investment through the EIS or from a venture capital trust (VCT).

How to apply for the SEIS

The good news is that applying for SEIS is just a two-step process that involves both your business and investors. Here’s a rundown of how you can apply:

• Get advance assurance: You’ll need to submit a request for advance assurance through HMRC before seeking investment. You’ll also need to provide details about your business, plans, and how you’ll use the investment.
• Issue SEIS shares: Once investors are ready to put money in, you’ll provide them with SEIS-qualified shares. From there, you submit the SEIS compliance statement (Form SEIS1) to HMRC.

What can I do with SEIS investment?

Money from the SEIS must be spent on qualifying business activities. This usually includes things like preparing to start a business, developing your products/services, buying equipment, or covering running costs.

SEIS investment cannot be used for paying off debts, buying land or buildings, or investing in another company.

Conclusion

The SEIS can be a game-changer for early-stage startups looking to secure funding, attract investors, and kickstart their business’s growth.

While there are rules around eligibility, the tax incentives and credibility it offers make it a great starting point for founders and entrepreneurs ready to take the next step.

If you have a strong business idea and meet the criteria, the SEIS could be just the very thing to give your startup the push it needs to get off the ground and grow.

If you feel your business may be eligible, you can apply to the SEIS scheme on the government website.