This is a guest blog post by Tasnim Mustafa ACA of Barnes & Scott
The Seed Enterprise Investment Scheme (SEIS), launched in April this year, offers some of the most attractive tax relief opportunities for investors seen in recent years. It has been described by a notable investor as “one of the most extraordinary incentives ever created”.
What is it?
The scheme gives investors income tax relief at 50% of the amount invested and a complete capital gains exemption on the sale of the investment.
Furthermore, in the current 12/13 tax year only, investors get a capital gains tax exemption on any capital gain they make – even on other assets, but only if the proceeds are reinvested into the scheme.
There are of course strict qualifying conditions and restrictions on the size and type of the investment, the start-up and the investor.
So what’s all the fuss about?
For investors, the tax incentives are extremely generous. An investment of £100k (the maximum limit for SEIS) will only cost the investor £22k, assuming full use of the income tax and capital gains reliefs. The investment would therefore have to lose over three quarters of its value before the investor began to make a loss
But the large reward comes in hand with high risk. The scheme only applies to start-up companies less than two years old, so there is a high inherent risk of complete failure. And investors are unable to make a quick exit – they must hold the shares for at least three years in order to receive the full benefits.
Who does it benefit?
The obvious benefit is to investors. But directors of start-ups can also obtain the relief.
Start-ups can also benefit by using their SEIS status to become more attractive to investors. In fact, many investors now see SEIS status as minimum criteria when investing in new businesses.
What are the downsides?
The scheme is not for everyone. Some entrepreneurs may prefer to sell debt in their company, rather than equity, especially if they are confident in the long-term success of their company.
The scheme also encourages riskier investments. Crowdfunding platforms have made it easier for more people to invest in small businesses. The government might unknowingly create a small asset bubble in start-ups, fuelled by tax-incentivised investors.
How is the scheme administered?
The scheme is administered by a two-stage process:
1. The company obtains approval to use the scheme from HMRC by submitting a compliance statement.
2. Upon receiving approval a compliance certificate is issued to investors, which they use to obtain their tax benefits.
There is also an “advance assurance” scheme that start-ups can obtain to confirm they qualify for the scheme.
So what happens next?
The scheme runs until 2017. HM Treasury predict that only 1000 small businesses will benefit over this period. Currently there are no figures on the amount invested in the scheme. Its wider implications are unlikely to be known for many years to come.