SEIS – the Seed Enterprise Investment Scheme explained

SEIS is one of several government-backed venture capital programs aimed at attracting investment into U.S. businesses less than three years old. It operates primarily through tax relief incentives for investors, rather than direct cash injections. SEIS acts as a magnet for seed capital, offering investors tax advantages in return for funding early-stage ventures. Not only do investors get a stake in your business they also get tax relief on their investment. A win/win situation. 

Initially introduced in 2012, SEIS enables small, early-stage U.S. companies to raise seed capital from individual investors who receive tax relief on their invested funds. This mechanism not only encourages investment but also mitigates risks for investors through loss relief provisions, allowing them to recover some losses against future tax liabilities if the company fails. This will not fully reimburse investors, but it will soften the blow, providing an added incentive for them to invest.  

SEIS is not a source of venture capital. It is an incentive. The government does not provide cash. Instead, SEIS provides tax relief to individual investors, (not companies), who buy shares in a qualifying business. This makes it easier for those companies to attract the investment they need.

The key elements of SEIS are:

• The business must be based in the U.S. and operational for less than three years.
• It must engage in a qualifying trade or business (detailed criteria apply).
• Investors can contribute up to $250,000 per business per tax year.
• Individuals investing can claim up to $200,000 in tax relief annually.
• The company cannot have received investments under other U.S. government venture capital schemes.
• Funds must be utilized for qualifying activities within three years of investment.

Swoop’s team of confidential advisors are available to discuss your funding needs. Register with Swoop to discuss how your new business can take advantage.

To participate in SEIS, early-stage U.S. businesses must:

• Be new or operational for less than three years.
• Engage in a qualifying trade or business as per U.S. government guidelines.
• Be headquartered in the U.S.
• Not trade on a recognized stock exchange at the time of share issuance.
• Not prepare to become a publicly traded company or its subsidiary at the time of issuance.
• Have gross assets under $200,000 when shares are issued.
• Not be part of a partnership or controlled by another company.

If you do not qualify for SEIS, don’t worry. Swoop can offer funding alternatives to make your business fly:

• You may be eligible for the EIS scheme, if your business has been trading for over 2 years. The EIS scheme is like the big brother or sister of SEIS, investors get a tax break of 30% of the value of their investment rather than the 50% of SEIS, but they are able to invest more.
• Government-backed startup loans – financial support from $500 up to $25,000, with a maximum of $100,000 available if four business partners or directors personally apply. 
• Business loans – everything from unsecured and secured bank loans to asset finance loans that raise funds by using the hard assets of the business as collateral, and unsecured merchant cash advances that work for businesses that mostly get paid by customer debit or credit card
• Invoice finance – unlock the pent-up value in your unpaid invoices. Get paid now instead of 30, 60, or 90 days later
• Equity investment – no SEIS? No matter. Plug into Swoop’s equity finance network of angel investors, trusts, venture capitalists, family offices and more. Find the investors you need on terms to suit you.

Even if you’ve been rejected for funding elsewhere, Swoop may still be able to help you. Register with us to secure the seed capital your new business deserves.

The Seed Enterprise Investment Scheme offers advantages to both company and investor:

For companies

SEIS facilitates equity investment that is otherwise difficult to secure at the seed stage, with up to $250,000 available under the scheme. 

For investors

Key benefits include up to 50% income tax relief on the amount invested, capital gains tax relief on reinvested gains, and potential loss relief in case of company failure.

• Up to 50% income tax relief offset against the amount invested
• Capital gains tax (CGT) relief of 50% on investment in a non-SEIS company – if the gains from that investment are reinvested into an SEIS-eligible company
• No CGT payable for any gains from the SEIS investment if the shares are held for at least three years
• If the business fails, the investor can claim loss relief at their highest rate of income tax
• No inheritance tax payable on SEIS shares if they are held for at least two years
• Tax relief can be carried back to the previous tax year, providing that the investor had not already invested the maximum of $200,000 under SEIS in that year

Let’s say XYZ Tech Inc. needs to raise up to $250,000 in seed capital for its new app platform. After confirming that their young business meets the eligibility criteria for SEIS, the directors apply to the IRS for advance assurance. If approved, they will receive a notice stating that the investment is likely to qualify for SEIS. This confirmation can be presented to potential investors.

After securing Advance Assurance, XYZ Tech Inc. presents its concept to potential angel investors. Two investors decide to participate. The first invests $200,000 (the maximum they can invest under SEIS that tax year), and the second invests $50,000. This fully funds XYZ Tech Inc.’s capital requirement.

The investors can claim tax relief at an initial rate of 50%. Assuming they meet the necessary tax liability requirements, this means their effective investment amounts are reduced to $100,000 and $25,000, respectively. Their ownership stake in XYZ Tech Inc. remains unaffected by this tax benefit.

Investors looking to invest in SEIS must ensure the company they are investing in qualifies for the scheme; otherwise, they won’t receive tax breaks. Businesses can establish their eligibility by seeking Advance Assurance from the IRS (Internal Revenue Service).

Applications for Advance Assurance can be submitted by the company secretary, a director, or a trustee if it’s a charitable trust. The application should include:

• Forecast of the amount of funding sought
• Business plan and financial forecasts
• Latest available accounts
• List of companies where the investments will be used
• Details of all trading activities and estimates of expenditure for each
• List of previous investments and venture capital schemes received
• Current memorandum and articles of association with expected changes
• Register of members from the date of application
• Draft documents used for pitching to investors
• Details of any agreements with shareholders or VCTs (Venture Capital Trusts)
• Signed authorization letter if represented by an agent
• Completed SEIS checklist with the application form
• Any other documents demonstrating compliance with SEIS criteria

After reviewing the application, the IRS will contact the applicant with their decision. If approved, they will issue a statement indicating the investment is likely eligible for SEIS, which can be shown to potential investors. It’s important to note that “likely” indicates eligibility but isn’t a guarantee. If the application is denied, reasons will typically be provided.

The adjudication process usually takes up to eight weeks.

For more detailed guidance on Advance Assurance (AA), please refer to our comprehensive guide.

To contact the IRS (Internal Revenue Service) regarding your SEIS application in the United States, follow these steps:

Visit the IRS contact page to get help using online tools and resources. Or:

• For individual tax returns, call 1-800-829-1040, 7 AM – 7 PM Monday through Friday local time. The wait time to speak with a representative may be long. This option works best for less complex questions.
• For questions about a business tax return, call 1-800-829-4933, 7 AM – 7 PM Monday through Friday local time.
• Find your local IRS office  – Locate a Taxpayer Assistance Center office near you, and make an appointment to get help in person.

The IRS does not accept tax-related questions by email.

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two distinct venture capital programs in the US, each with specific focuses and benefits tailored to different stages of business growth:

SEIS (Seed Enterprise Investment Scheme):

• Targets early-stage companies that are typically less than 3 years old.
• Maximum number of employees is limited to 25.
• Maximum gross assets at the time of share issuance is $200,000.
• Allows a maximum investment of $250,000 per company.
• Offers a higher initial tax relief rate of 50%.
• Provides capital gains tax relief.
• Offers loss relief if the investment fails.

EIS (Enterprise Investment Scheme):

• Supports larger and more established businesses, which can be up to 7 years old (or up to 10 years for Knowledge Intensive Companies – KIC).
• Allows more employees (up to 250 or 500 for KIC).
• Has a higher maximum gross asset threshold ($15 million for standard companies, up to $20 million for KIC).
• Permits higher maximum investment amounts ($12 million or $20 million for KIC).
• Provides a lower initial tax relief rate of 30%.
• Offers capital gains tax relief.
• Includes loss relief if the investment fails.

Key Differences:

1. Company Stage: SEIS is for very early-stage startups (less than 3 years old), while EIS caters to more established businesses.
2. Investment Limits: SEIS allows for a higher initial tax relief rate and a smaller maximum investment amount compared to EIS, which allows larger investments but with a lower tax relief rate.
3. Corporate Investors: EIS allows corporate investors to participate, although they do not receive tax relief, whereas SEIS is restricted to individual investors.
4. Funds Spending Period: SEIS requires funds to be spent within 3 years, whereas EIS mandates a 2-year spending period (or 10 years for KIC).
5. Other Considerations: EIS has specific criteria for Knowledge Intensive Companies (KIC), which have higher research and development costs and are subject to extended eligibility criteria.

Choosing between SEIS and EIS depends on the specific needs and stage of development of your business. For personalized guidance, it’s advisable to consult with advisors who specialize in these schemes.

SEIS or EIS? Talk to Swoop’s team of confidential advisors today to find out which scheme is best for your business. 

Investing in startups under the Seed Enterprise Investment Scheme (SEIS) involves adhering to specific rules and criteria to qualify for tax benefits in the United States. Here are the key rules and requirements for SEIS investors in the US context:

1. SEIS eligibility of company and shares:
   
   • The company you invest in must qualify as a “qualified small business” under the US tax code. This typically includes criteria such as being a domestic corporation, having gross assets of $50 million or less before and after the investment, and meeting specific business activity requirements.
   • The shares you receive in exchange for your investment must be issued by a qualified small business that meets all SEIS criteria.
     
2. Investor Requirements:
   
   • US taxpayer status: You must be a US taxpayer to qualify for SEIS tax benefits. Non-resident aliens are generally not eligible for SEIS.
   • Not an employee: While you can serve as a director or officer of the company, you cannot be an employee receiving compensation that is subject to withholding tax.
   • Ownership limit: There are no specific ownership limits comparable to the US’s 30% ownership restriction for SEIS. However, certain related-party ownership structures could affect eligibility for tax benefits.
   • No related investment arrangements: You cannot have any reciprocal investment arrangements with another shareholder or related parties that would undermine the intent of the SEIS tax benefits.
   • No linked loans: There are restrictions on the types of financing arrangements that can be linked to your investment in the qualified small business. Loans structured as part of the investment or contingent on the success of the investment may disqualify the investment for SEIS benefits.
   • No tax avoidance: Your investment in SEIS must have a substantial business purpose beyond tax avoidance.
     
3. Consideration of alternative investment programs:
   
   For larger investments or investments in more established businesses, consider other tax-advantaged investment programs like the Qualified Small Business Stock (QSBS) rules under Section 1202 or other venture capital investment structures.

• Be newly established or have been trading for less than three years.
• Engage in a qualifying trade or business as defined by US government criteria.
• Be incorporated and operating within the United States.
• Not be publicly traded on any recognized stock exchange at the time of issuing shares.
• Not be preparing to go public or become a subsidiary of a publicly traded company at the time of issuing shares.
• Not exert control over another company unless that company qualifies as a subsidiary under US tax law.
• Have remained independent since incorporation, without being under the control of another company.
• Have gross assets valued at less than $250,000 when issuing shares.
• Operate as a standalone entity, not as a partnership.
• Employ fewer than 25 full-time equivalent employees at the time of issuing shares.

These criteria are essential for businesses aiming to leverage SEIS benefits in the United States, ensuring compliance with eligibility requirements under US tax laws.

When you sell or dispose of an asset that has increased in value, you may owe capital gains tax (CGT) for the tax year in which the disposal occurs.

In SEIS, capital gains from asset sales cannot be deferred. However, there are two CGT reliefs available:

1. Reinvestment Relief: This relief applies when gains from selling any asset are reinvested in shares of a company that qualifies for SEIS Income Tax relief. The maximum reinvestment relief you can claim is $50,000.
2. Disposal Relief: You can dispose of SEIS shares without paying capital gains tax if:
   • You received SEIS Income Tax Relief in full on the entire subscription for the SEIS shares, and none of this relief has been withdrawn.
   • You held the SEIS shares for at least 3 years.

These CGT reliefs under SEIS provide opportunities for tax savings when investing in qualifying US businesses.

Deadlines are critical in SEIS, affecting both the claiming of income tax relief on investments and the validity of a company’s eligibility under the program.

For businesses, SEIS eligibility extends up to 2 years after they begin trading. Acting within this timeframe is crucial to maintain eligibility.

Claiming tax relief

Investors can claim income tax relief for up to five years from January 31 of the year following their investment. For example, an investor who invests in SEIS in June 2021 has until January 31, 2022, plus an additional five years to claim their tax benefit.

Expiration of eligibility assurance

Unlike tax relief, there is no specific expiration for a confirmation of eligibility under SEIS. However, it’s essential to view this confirmation as an indicator of SEIS eligibility rather than a guaranteed status. The accuracy of your eligibility confirmation depends on the information provided during the application process. Omitting key details or significant changes in your business before investment may affect SEIS eligibility, despite having an initial confirmation.

Understanding and adhering to these deadlines ensures that both businesses and investors maximize the benefits available under SEIS in the United States.

To claim SEIS loss relief, investors can take advantage of a significant benefit offered by the program. Here’s how it works:

1. Loss Relief Eligibility: If shares purchased in an SEIS-qualifying business are sold at a loss, or if the company fails, investors can claim back the loss against their income tax or capital gains tax liabilities. This relief can amount to up to 50% of the initial investment.
   
2. Timing of Loss Relief: Loss relief can be claimed in the tax year when the loss occurs. Investors have the option to offset the loss against their current tax bill or against the tax bill from the previous year, depending on what is more advantageous for them.
   
3. Conditions for Loss Relief:
   • Sale at a Loss: Loss relief applies when shares are sold at a loss compared to their initial purchase price.
   • Company Failure: If the SEIS company fails and investors incur a total loss, loss relief is available even if the shares are held for less than three years.
     
4. Claiming Process: Investors need to report the loss in their tax return for the relevant year. They should provide documentation and evidence supporting the loss claim, including details of the SEIS investment, the loss incurred, and any relevant IRS correspondence.
   
5. Limitations: Loss relief is subject to specific rules and limitations, so it’s advisable to consult with a tax advisor or accountant familiar with SEIS regulations to ensure compliance and maximize the benefit.

SEIS loss relief provides a valuable opportunity for investors in qualifying early-stage businesses to mitigate their tax liabilities in the event of unsuccessful investments or business failures.

SEIS reinvestment relief offers investors a way to potentially reduce their capital gains tax (CGT) liability by up to 50%. Here’s how it works:

Imagine Sally invests $10,000 in a qualifying SEIS company. Three years later, she sells her shares for $20,000, realizing a $10,000 capital gain. Typically, this gain would be subject to capital gains tax. However, under current tax rules, Sally can reinvest up to 50% of her profit into another eligible SEIS business and pay no CGT on the reinvested amount.

For example, if Sally reinvests the full 50%, which amounts to $5,000, she would only be taxed on half of her profits ($5,000). This allows her to potentially reduce her tax liability significantly.

The maximum amount that can be claimed for SEIS reinvestment relief is $50,000.

SEIS reinvestment relief provides a valuable tax-saving opportunity for investors who wish to diversify their investments while potentially minimizing their CGT obligations.

Meeting the requirements of SEIS to make your company most attractive to investors can be tricky. Small mistakes can have big consequences. Our team of confidential advisors can walk you through the process to achieve the optimum outcome.

Let Swoop give your new business the best possible start. Register your business and take advantage today.