SEIS tax pitfalls and time limits

Tax relief from HM Revenue and Customs is often a moveable feast – and the new Seed Enterprise Investment Scheme is tied up with some pitfalls and restrictions for investors.

Providing anyone putting their cash in to a SEIS understands how the scheme works, that’s not a problem, so here is a closer look at some of the important points to consider:

  • Companies can only raise £150,000 in SEIS funding – and that’s not per tax year but the total allowed per company looking for investors under the scheme, while investors can only input a maximum £100,000 per tax year in to start-up company under the scheme.
  • Companies have to be genuine start-ups that have not received any funding under the Enterprise Investment Scheme (EIS) or Venture Capital Scheme (VCT)
  • Companies have to spend the cash they raise from a SEIS on ‘qualifying business activities’ within three years of raising the cash – while investors cannot claim tax relief until 70% of the cash is spent.

    This clause is to encourage firms to spend the money the cash they raise under a SEIS and an anti-avoidance condition to make sure investors are receiving tax relief on funds actually spent on activities involved in growing a business.

  • Companies qualifying for SEIS investment must be early stage businesses – that means shares relating to any SEIS investment must be issued within 24 months of incorporation.

    Like an EIS, the shares must be held by the investor from three years before they can benefit from the maximum income tax and capital gains tax reliefs.

    Share disposals within the 36-month holding period could result in a repayment of any income tax relief and loss of any CGT exemptions.

The time limit and SEIS spending rules are designed to stop taxpayers washing cash through a SEIS just to gain the lucrative reliefs and exemptions.