The Seed Enterprise Investment Scheme was launched by the United Kingdom government on 6 April 2012 in order to encourage investors to finance startups by providing tax breaks for backing projects they may otherwise view as too risky.
Since its inception, more than 50,000 investors have invested over $2.3 billion in companies using the scheme, which is offering investment opportunities through the Gateway.
The Seed Enterprise Investment Scheme, or seis, was established by the British government in order to encourage small and startup companies to attract more investment capital. The government introduced the program on April 6, 2012. The program gives investors the opportunity to make tax-advantaged investments if they spend at least £100,000 in a specified field.
The investments are capped at a maximum annual income of £200,000 and the investor must hold shares for at least three years.
Unlike the Angel Tax Relief Scheme and the Enterprise Investment Scheme both of which provide incentives for investors to invest in startup or early stage companies, the seis is tailored specifically for funding early stage enterprises.
The Seed Enterprise Investment Scheme provides tax reliefs for individuals who choose to invest in the equity of a company in its early stages of development. Tax reliefs are given at the point of the company’s incorporation and continue every year the shares are held. An individual will be required to pay capital gains tax at a rate lower than the general income tax rate, but higher than the rate he or she would have paid in a non-siss investment, if the equity investment or shares is sold. However, if the investor chooses to hold the shares for a period of three years, he or she will benefit from the reduced capital gains tax rate of 10% on disposal of the investment.
Retail investors are currently subject to an annual investment cap of £100,000 per seis company after which there is no further tax relief available. From April 2013, this cap was removed and retail investors could invest up to £1 million. However, in December of that same year the cap was reinstated and reduced to an investment cap of £150,000 a year, in order to lessen the appeal of the tax breaks to large financial institutions.
In addition to these limits, larger specialized investments are made subject to the rules governing the Enterprise Investment Scheme.
Currently, there are 1,300 companies in the UK which are eligible for seis. The list is available from HMRC.
Potholes on the Route
While investing in seis shares has provided great opportunities to many investors, the seis route is not without its potholes. An example of this is the case in the UK of Member of Parliament’s David Chaytor.
Mr Chaytor was convicted by a Californian court for tax fraud. It came to light in 2012 after a Californian court found that Chaytor had ordered the transfer of £15,000 of his seis capital gains to his wife so that they did not suffer a huge tax liability.
In the court’s verdict, the judge stated Chaytor had, “misrepresented material facts to the tax authorities” and that he had “deceived, duped or flat-out lied to the UK authorities.”
The judge also stated that, “It is important to deter others from engaging in similar fraudulent conduct,” and ruled that Chaytor should be imprisoned for sixteen months.
The reason for the difference in what was spent on the shares (15,000) and what was filed in the tax return (30,000), is that Chaytor’s wife was ordered to transfer 10,000 shares worth £15,000 to Chaytor and then sold them, as this would have lessened their tax liability.
Chaytor’s wife pleaded guilty for fraud and for aiding and abetting her husband. She paid a fine of £1,500.
The lesson here is that in order to protect yourself from potential legal issues regarding seis, adhere to the rules set by the HMRC.
Equity versus Debt
There are two forms of investments that can be utilized by tax payers who wish to invest in seis: equity and debt. An equity investment provides the opportunity to make more money than a debt investment as an equity investment is entitled to any profit made by the company and does not bear any risk of the company’s ability to pay its debtors.
Debt is not entitled to the profit of the company and therefore has a lower risk. It is less likely that debt investors’ investment returns will be affected by a dividend, and they are not entitled to any share of the firm in the event of a sale.
Most seis investments in the UK are made in the form of equity, as this at least provides a potential source of return. The equity investment in a company in the UK is called an s.a.e. (security against shares).