The Seed Enterprise Investment Scheme (SEIS) and what it means for new angel investors
With huge tax breaks, what could SEIS mean for you? SETsquared’s Nick Sturge takes a closer look
Securing funding in the early stages of developing a company is often the make or break for a company. In a climate where funding is scarce any incentives to get high net worth individuals to put their cash into start-ups should be welcomed.
The Seed Enterprise Investment Scheme (SEIS), part of the government's buffet of Budget measures to encourage investment in small businesses, offers a tax break to entice would-be angel investors to take the plunge and makes the diversion of funds from other investments more attractive.
Coming into effect in April 2012, SEIS is similar to the Enterprise Investment Scheme (EIS). It will allow individuals, ‘armchair' investors and business angels to earn up to 78% in combined income tax relief and exemption from capital gains tax (CGT) on investments of up to £100,000 in the first year. The total level of relief will potentially reach 78% if taxable gains realised in 2012-2013 are reinvested through SEIS in the same year (50% income tax relief plus the up to 28% CGT avoided on earlier gains). It also means that directors in the company can invest and gain the tax relief too, provided they do not and will not have a substantial interest in the company.
HMRC believes the scheme will encourage the development and accelerated growth of more start-ups with the backing of SEIS investors and will incentivise business angels to consider investing in early stage companies.
To qualify for the scheme, companies looking for investment must be carrying out a trade started within the previous two years, have a maximum of 25 employees and assets of less than £200,000. The government expects around 300 companies will benefit in the first year. It also estimates the tax breaks for 2012/13 will be worth £50m to would-be investors.
While the scheme looks like it could be a great incentive to investors, and a big help to start-ups, it won't be until it beds in that the full extent of its effects will become clear.
The pitfalls in identifying the right start-up company to invest in still remain. The national survival rate of start-ups lasting more than three years is only 64.7%, so risks are still high. This is where organisations such as SETsquared, which supports 250 businesses across the facilities of five universities, come in as the support they provide to start-ups help to de-risk the investment opportunity and ensure they are on a fast growth path. This makes them more viable investment propositions. In SETsquared, nearly 90% of the early-stage, high-tech companies graduating from our incubation facilities are still in existence three years on.
One of the requirements in order to qualify for SEIS is that investors must invest in ordinary shares or preference shares with very limited rights as opposed to the more typical preferential rights, which is likely to change investor behaviour. Dom Moorhouse, an entrepreneur and angel investor, who has been waiting for the scheme to go live said: “My inclination, to date, has been to invest only in preferential shares – as some mitigation of the high risk being taken – but this relief proposition starts to ‘tip the balance'.”
Start-ups are a critical part of the UK's growth and if they have more seed investment earlier and quicker, they have a better chance of getting market traction and being successful. All and any legislation that improves their chances is welcomed. These new tax breaks will widen the appeal of early stage companies to potential investors, and encourage people to take advantage of the generous incentives.