Small businesses strengthen the backbone of the UK economy. Startups.co.uk cites the estimate that 5.2 million businesses are responsible for 48% of UK employment and a combined annual turnover totalling £1.8 trillion. It’s clear, then, that startups need access to capital that can facilitate their growth. They can more easily source this capital by using the Seed Enterprise Investment Scheme.
A rundown of the Seed Enterprise Investment Scheme
The Seed Enterprise Investment Scheme – or SEIS – was launched in April 2012 as a government initiative intended to encourage investors to put money into small companies that are promising if unproven. By opting into the program, investors can receive tax-efficient benefits while helping to boost economic growth. However, a range of criteria must be met by both the firm and investors.
If you were assuming that the SEIS must have a history stretching further back than 2012, you might have been thinking of the Enterprise Investment Scheme. The EIS, as it is otherwise called, came about in 2014 but lacks the focus of SEIS on assisting small companies aiming to raise equity finance. Investors using either scheme can receive income tax relief and capital gains tax exemption.
How could your startup in particular benefit?
There are various boxes which your company must tick to be eligible for SEIS funding – which, in any case, has a cumulative limit of £150,000. For example, your company must be UK-registered, not be listed on any recognised stock exchange, and employ members of staff numbering under 25. It is also crucial that the company has not traded for longer than two years and does not hold gross assets surpassing £200,000 in value. The company has to also be trading in an approved sector.
Encouragingly, if you are considering turning to the SEIS for your own startup’s benefit, each participating investor must hold shares in your company for three years from when they are issued. This situation can obviously help provide your startup with a steady and reliable source of money during what could be rocky early years for the business.
Consider these restrictions before you go ahead
Nonetheless, there are still some restrictions that will be placed on each investor. For example, the investor is not permitted to be an employee – unless they take up a directorship – or your company. Furthermore, in terms of assets, voting power or share capital, their interest in your company cannot exceed 30%. Ultimately, the investor cannot, during their three years as a qualifying shareholder, receive value – other than “ordinary commercial payments” – from your company.
Drawing upon the SEIS can also be a very appealing strategy if you intend to run a crowdfunding campaign for your company. Nonetheless, you might want to heed some new restrictions recently introduced by HMRC and detailed by Crowdfund Insider.
Those restrictions could have implications, but likely positive ones, for your funding strategy. You can also receive assistance from Accounts Lab, which can help you gain HMRC approval and reach out to potential investors.
