The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are integral pillars of the UK start-up economy. Angel investors who are willing to take significant risks by investing start-ups and small businesses will usually also want to take advantage of income tax deductions on their investment and benefit from no capital gains tax (CGT) liability arising upon the sale of their shares further down the line.
Companies are at liberty to raise up to £12m in EIS when they have exhausted their £150k SEIS allowance with SEIS investors able to take advantage of a 50% deduction of the investment amount against their income tax vs 30% for EIS. This created a sort of ‘glass ceiling’ of £150k on the first investment round sizes and meant that many investors would only be willing to invest pursuant to SEIS.
Today, companies often need to raise more than £150,000 in their first fundraising round if they are to be sure to have enough capital to build a team and bring a product to market before needing to raise further capital by way of another investment round.
In this article, we analyse and consider the changes the Government intends to make to the SEIS scheme from April 2023 and how companies and investors alike can take advantage of the new rules, limitations to such changes, and what to look out for in the months ahead!
The Key Changes
The key changes proposed which are applicable to companies are as follows:
- companies are now able to raise up to £250,000 in SEIS (this limit was previously £150,000);
- companies are now able to raise SEIS within the first three years of trading (this was previously two years); and
- companies must have less than £350,000 in gross assets to be able to raise SEIS (this was previously £200,000).
Investors themselves also benefit from these changes to the SEIS scheme. Previously, investors could only invest a maximum of £100,000 per year in SEIS, but now this personal limit has been doubled to £200,000 per year.
The only downside to these changes is that they don’t take effect immediately, and will come into force at the start of the new tax year on 6 April 2023, which is approximately 5 months away.
Can I take advantage of these changes now?
Although these SEIS changes will come into force from 6 April 2023, the SEIS rules are applied on the date that the shares are issued. Therefore, a company could raise the investment now and only issue the shares after 6 April 2023. To do this, the company would need to enter into an Advance Subscription Agreement (“ASA”) with investors, with a six-month long-stop date which will enable investors to invest now, but the shares will only be issued in April 2023 when the new rules apply.
It must be borne in mind that in accordance with VCM33025, to be compatible with SEIS ‘HMRC expects a longstop date to be no more than 6 months from the date the ASA is entered into’. It may also be the case that a company has already raised £150,000 in SEIS, and you would like to benefit from the changes to SEIS. As long as the company meets the new rules (i.e., that it has been trading for less than three years at the date the shares are issued (on or after 6 April 2023), and EIS shares have not yet been issued), then the company will be able to raise a further £100,000 pursuant to SEIS.
It may also be the case that a company has been trading for more than two years. In reality, to rely on SEIS under the new rules, the longest time the company could have been trading is 2.5 years as of 6 October 2022 (and accordingly it will be able to comply with the three-year limit on 6 April 2023). Therefore, a company in this situation could benefit from entering into an ASA with investors, due to convert on 6 April 2023.
Please note that the above is based on the limited information provided by the Government in their September 2022 mini-budget statement and Growth Plan document. Parliament must approve the budget changes and HMRC will need to update their website and confirm the exact details as to the changes to SEIS. HMRC will be required to confirm, for example, that the new rules will start on 6 April 2023, that the new rules will apply to shares issued on or after 6 April 2023 even if the funds were received before then (i.e., pursuant to an ASA), et cetera.
In addition, it is unclear as to whether these changes will be affected by Rishi Sunak’s recent appointment as Prime Minister and his soon to be newly-appointed Cabinet.
How we can help?
Following the Government’s announcement, start-ups will have greater opportunity to successfully utilise SEIS.
Here at The Jonathan Lea Network, we have significant experience and expertise with SEIS and EIS matters, utilising our skills to advise on advance assurance applications and resolve common and uncommon issues that may arise during the process.
If you would like to discuss submitting an EIS/SEIS advance assurance application, or if you would like to know more about the process and our fees, we offer a 20-minute no-cost, no-obligation call as a starting point.
If this is of interest, please get in touch via our firstname.lastname@example.org email address to schedule a call with one of our SEIS/EIS specialists.