By Matthew Cushen
No serious entrepreneur would dream of launching a product or service without getting into the heads of their consumers. You’d want to understand when, where and how often your offer might be purchased and what you are competing against for a share of their purse.
It’s the same with ‘selling’ your business to investors. Best to understand as much as you can about their world, their motivations and what’s competing for their cash. We’ll pick up on this theme in future posts, but for now we’ll explore one important consideration for so called ‘seed investors’.
One of the reasons equity investment for start-ups is more available than ever before is that the government has been encouraging investors with generous tax reliefs, in recognition of the highly speculative nature of seed investing.
The Seed Enterprise Investment Scheme (SEIS) for investors
The Enterprise Investment Scheme (EIS) was set up in 1994 and continued to be supported through Labour governments. It has since been made more attractive by the Conservative government, and has established itself as a part of tax legislation that neither of the main parties would be likely to compromise.
The Seed Enterprise Investment Scheme (SEIS), established in 2012, is an extension of EIS and offers even more generous reliefs as an incentive for investors in very early stage businesses.
In the 2014/15 tax year, 2,185 companies raised £168m through SEIS. Significant growth from the 1,995 companies and £148m in funding in 2013/14.
The tax advantages for investors in an SEIS qualifying business are significant. An individual investor can make multiple SEIS investments of up to £100,000 per annum and qualify for:
How start-ups qualify for SEIS
You can see that these are significant for an investor paying income tax. And even more so if they have a capital gains tax liability and/or are contemplating their own mortality. Therefore it would be a struggle for a start-up without SEIS qualification to attract an equity investor. The good news is that the rules are pretty easy to satisfy. It may be helpful to consult an accountant, but broadly the criteria are:
Most investors will want certainty about SEIS qualification. An application for ‘advanced assurance’ can be submitted to HM Revenue & Customs for approval. It’s not difficult and makes subsequent paperwork easier.
An application is normally processed in around four weeks, but sometimes there are delays. Anecdotally, we are hearing that applications are taking around six to eight weeks currently. So it’s good to get the application underway as soon as you can.
The maximum raise under SEIS is £150,000. But in most cases this should be enough to get a business up and running and able to create some proof points before needing to raise more money.
Beyond this the business can raise its next funds, up to £5m, under the EIS scheme. The tax reliefs have a similar structure, but are less generous – e.g. 30% income tax relief – to reflect a slightly less risky investment.
HMRC has a guide to SEIS and a helpline 0300 123 1083. Both are easier and more useful than you might expect.