Seed Enterprise Investment Scheme (SEIS) for Early-Stage Companies

Introduction

The Seed Enterprise Investment Scheme (SEIS) helps very early-stage companies raise up to £250,000 by offering generous tax reliefs to individual investors who buy shares in your business. This scheme is designed specifically for companies that are just starting to trade, with strict limits on your company's age, assets, and employee numbers. Understanding the qualifying conditions is essential before you approach investors or issue shares.

How SEIS works

SEIS encourages individual investors to back early-stage companies by offering them tax reliefs on their investment. For your company, this makes your shares more attractive to potential investors, helping you raise the capital you need to get your business off the ground.

You can raise a maximum of £250,000 through SEIS. This limit includes any other de minimis state aid (small amounts of government assistance) you've received in the 3 years up to and including the date of the investment. Any money raised through SEIS also counts towards the limits for other venture capital schemes if you apply for them later, such as the Enterprise Investment Scheme (EIS).

The scheme comes with strict rules you must follow for at least 3 years after the investment is made. If you break these rules, your investors will lose their tax reliefs, which could damage your relationship with them and your company's reputation.

Company eligibility requirements

Your company can use SEIS if it meets all of the following conditions:

Basic requirements:

• Established in the UK
• Carries out a new qualifying trade (more on this below)
• Not trading on a recognised stock exchange when the shares are issued
• No arrangements in place to become a quoted company or a subsidiary of one
• Does not control another company (unless it's a qualifying subsidiary)
• Has not been controlled by another company since incorporation

Size limits:

• Gross assets must not exceed £350,000 when the shares are issued
• Fewer than 25 full-time equivalent employees in total (including any subsidiaries) when shares are issued
• Neither your company nor any subsidiaries can be a member of a partnership

Previous investment restrictions:

You cannot use SEIS if you've already received investment through the Enterprise Investment Scheme (EIS) or from a venture capital trust (VCT). SEIS is specifically for companies at the very beginning of their journey.

What counts as a new qualifying trade

The "new qualifying trade" requirement is crucial. If your company is already carrying out a qualifying trade, it must not have been carried out for more than 3 years by either your company or any other person who then transferred it to you.

Your company (or any qualifying subsidiary) must not have carried out any other trade before starting the new trade you're seeking investment for.

The trade must be run as a commercial business aiming to make profits. However, certain excluded activities don't qualify - these are activities that wouldn't be eligible under the venture capital schemes rules.

How you can use the money raised

You must spend all money raised through SEIS within 3 years of the share issue on:

• A qualifying trade
• Preparing to carry out a qualifying trade
• Research and development expected to lead to a qualifying trade (such as a project advancing science or technology)

You cannot use the investment to buy shares, except in a qualifying 90% subsidiary that will use the money for a qualifying business activity.

The risk to capital condition

Your investment must meet the "risk to capital condition" - a requirement designed to ensure SEIS supports genuinely risky ventures rather than safe investments with tax advantages.

This means:

Growth intention: Your company must intend to grow and develop its trade over the long term. You'll use the investment to expand things like revenue, customer base, and employee numbers. This growth should be permanent and not dependent on continued investor support.

Genuine risk: The investment must carry a real risk that investors will lose more capital than they're likely to gain as a net return. HMRC considers the net return to include dividends, interest payments, other fees, capital growth, and upfront tax relief.

What HMRC examines:

When assessing this condition, HMRC looks at your company's sources of income, assets, structure, use of subcontractors, how the investment opportunity is marketed, and relationships with other companies.

Prohibited arrangements:

You won't meet this condition if there are arrangements that give investors priority over others, allow them to withdraw money as soon as possible, or protect their capital so other investors' money is used first.

Share requirements

The shares you issue must meet specific criteria:

• Paid up in full, in cash, when issued
• Full risk ordinary shares
• Not redeemable
• Carry no special rights to your company's assets

Shares can have limited preferential rights to dividends, but these rights cannot accumulate and dividends cannot be varied.

Prohibited arrangements when issuing shares:

You cannot have any arrangement to:

• Guarantee the investment or protect investors from risk
• Sell the shares at the end of or during the investment period
• Structure activities so investors benefit in ways not intended by the scheme
• Create reciprocal agreements where you invest back in an investor's company to also gain tax relief
• Raise money for tax avoidance purposes - the investment must be for genuine commercial reasons

The application process

Before issuing shares, you can request advance assurance from HMRC - an indication that your share issue is likely to qualify. This gives investors confidence before they commit their money.

After you've issued shares, you must submit a compliance statement (form SEIS1) to HMRC. Only then can your investors claim their tax reliefs.

Documents you'll need:

If you have advance assurance, provide copies of any documents that have changed since it was granted.

Without advance assurance, you must provide:

• Business plan and financial forecasts
• Copy of latest accounts
• Explanation of how you meet the risk to capital condition
• Details of all trading activities and expected spending on each
• Up-to-date memorandum and articles of association
• Information memorandum, prospectus, or other fundraising documents shown to investors
• Details of any other agreements between your company and shareholders
• List of amounts, dates, and venture capital schemes under which you've previously received investment
• Any other documents demonstrating you meet qualifying conditions

You can only submit the compliance statement after your company (or a qualifying 90% subsidiary) has started carrying out the new qualifying trade.

Key considerations

SEIS is specifically designed for very early-stage companies with significant growth potential. The strict conditions around company age, size, and the risk to capital requirement mean it's not suitable for established businesses or low-risk ventures.

If you're considering SEIS, plan carefully to ensure you meet all conditions not just when you issue shares, but for the full 3-year period afterwards. Breaking the rules means your investors lose their tax reliefs, which could seriously damage investor relations and make future fundraising difficult.

Sources

• Apply to use the Seed Enterprise Investment Scheme to raise money for your company

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.