Only 2,320 small businesses took HMRC up on this tax break in the 2017-18 tax year. A decrease of 4% on the previous year.
It’s notoriously difficult for new businesses to attract money from investors and the Seed Enterprise Investment Scheme is designed to make such investments more attractive by reducing the risks with tax relief.
So why aren’t more businesses using the SEIS?
What is the Seed Enterprise Investment Scheme (SEIS)?
Regardless of their existing tax bracket, investors that participate in SEIS investments receive income tax relief at a rate of 50%. There are other investor benefits too:
- A reduction in the value of the business is obviously not good news. But, as part of SEIS, investors can offset any of their losses against their income tax bill.
- Investors only lose a small proportion of their initial investment if the worst happens and the company folds.
- Profits from SEIS investments are not subject to capital gains tax – with no defined ceiling.
There is a maximum investment amount of £100,000. Effectively, the parameters of the scheme mean that it only costs businesses half of this amount because of these income tax arrangements.
Who is eligible to apply for the SEIS?
There are a series of eligibility criteria for the Seed Enterprise Investment Scheme that apply to the businesses making the application. For example:
- Companies can receive a maximum of £150,000 of investment through the scheme.
- Business must only employ a maximum of 25 people.
- Assets of the company must be worth a maximum of £200,000.
- The company must be new, which means no more than two years old.
- It must not be a partnership.
These are the main criteria, there are other details to consider, which you can find within HMRC’s guidance document.
Companies which are involved in these trades (for 20% or more of their business) are not allowed to participate in SEIS:
Some types of businesses are excluded from the scheme. For example, your company may not qualify if more than 20% of your trade includes things like:
- “coal or steel production
- farming or market gardening
- leasing activities
- legal or financial services
- property development
- running a hotel
- running a nursing home
- generation of energy, such as electricity and heat
- production of gas or other fuel
- exporting electricity
- banking, insurance, debt or financing services”
You can find all the details in this government document.
Why aren’t more people using the scheme?
The simple answer to this question is that they don’t know it exists. That’s it. Businesses simply aren’t aware that it is an option for them. Perhaps HMRC could do some promotional work around the SIES in order to boost its visibility and help even more small business find their investors.
If you meet the basic eligibility criteria, it’s worth looking into the SIES to get the financial investment your business needs to continue to grow.