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Seed Enterprise Investment Schemes: Hoping for Fiery Dragons and Angels' Wings

Seed Enterprise Investment Schemes: Hoping for Fiery Dragons and Angels' Wings

The new Seed Enterprise Investment Scheme (SEIS) was introduced in the Autumn budget 2011. The new scheme is part of the Government's plan to promote business growth amongst start-up companies in the United Kingdom.

While the older Enterprise Investment Schemes (EIS) and the Venture Capital Trusts (VCT) remain in existence; the new SEIS provides some additional tax advantages which may incentivise a broader spectrum of investors in small scale start up companies. In short, it may be seen as a step before larger scale EIS schemes that have been around for a few years now. As such it may attract alternative investment funding from "Dragons" and or "Angels".

Start date and income tax relief

SEIS took effect from 6 April 2012 and allows for a maximum input of £100,000 per annum or £150,000 cumulatively over a number of years, to the same company. The investors receive a 50% tax relief for the amount that they have invested in that year, regardless of the profit margins of the company. It is thought that the tax relief may be carried back and offset against previous years if the tax relief provided is in excess of the investor's tax bill for that year. As "sideways" income tax relief was curtailed in the recent budget, SEIS might be looked at as being of some comfort as an alternative, particularly in the small business situation where equity can be granted to outsiders (or Dragons/Angels) who may consider providing backing in difficult economic circumstances.

Other tax relief/s

For the year 2012-2013 any gains on disposals that are invested through a SEIS will be exempt from Capital Gains tax. This means that there can be a tax relief of 72% in the first year for any investment made. After the inaugural year, there shall remain a CGT exemption for the disposal of any shares that qualify under the scheme.

Conditions

The new scheme has been incorporated into the Income Tax Act 2007 in the new "Part 5A". The conditions of the scheme are:

• The company must be a UK company.

• It must have no more than 25 employees.

• Its assets cannot exceed £200,000.

• They must operate in a "qualifying sector" ie a new trade.

• The company must not have been incorporated within 2 years of a share release.

• The shares must be ordinary shares, paid in cash and in full.

The Act also states that the investment will not qualify when it comes from a "qualifying investor". In other words, the investor is not permitted to have more than a 30% stake in the company or the voting rights, or a substantial interest in any subsidiary company.

Conclusion

As SEIS applies to incorporated companies only. Also, likely users (say, small scale businesses and start-up entrepreneurs) should be aware that although SEIS may appear an attractive scheme on paper, some issues/ sacrifices to bear in mind may be:

- Having to start up as a company (rather than a partnership with limited liability or otherwise) and thereby having to lodge accounts and other compliance documents regularly with Companies House.

- Requiring forfeit of a share of your company to attract the investment.

- Losing control and privacy to some degree e.g.in a family business.

From any likely investors' ("Dragons'") perspective, it should be noted that although SEIS may offer welcome tax advantages. However he/she might also be well advised to do comprehensive due diligence and "risk homework": 50% of new start-ups may fail in the first year and 95% in the first five years. The tax relief will only count if our "dragons" backing fires up or "angels'" capital manages to get "wings" or in other words is seen to be capable of or make a solid return on investment.

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