The Seed Enterprise Investment Scheme (or SEIS), was designed by the government as an incentive for private individuals to provide finance for new companies.
Thanks to the credit crunch, young companies without much of a track record find it almost impossible to get finance from traditional sources. Traditional banks have criteria that are difficult to meet. And even if a start-up does meet the tests, the interest rates offered may be prohibitively expensive.
To counter this problem, Chancellor George Osborne announced the SEIS in his Autumn Statement. The scheme offers a double relief to people investing in new companies: not only is there a 50% income tax relief (regardless of the marginal rate paid by the investor), but if the investment is made using a gain on a disposal that would otherwise bring about a charge to CGT, the investor gets a capital gains tax “holiday” of one year.
Of course, there are limitations to the scheme. For instance, the relief only applies to the first £100,000 worth of investment for each investor. It also only applies to companies that have fewer than 25 employees and those that have £200,000 or less worth of assets at the point of investment.
As always, it is difficult to say how many takers there will be for the scheme. The Revenue has estimated that 300 companies will benefit from investment in the scheme’s first year, which will begin on 6 April 2012.
One thing is very clear: the scheme cannot be used by entrepreneurs who want to invest in their own business. Neither employees nor people with a controlling interest in the company will qualify for SEIS relief.
The beneficial treatment will also only apply to companies carrying on businesses that are genuinely new. HMRC has made it clear that it will police this scheme carefully, so existing enterprises will not be able to form SPVs to attract investment from it.