The conditions listed below must be met by a company to qualify for investment under SEIS, both at the time of the investment and throughout the three-year minimum holding period. If the company doesn't meet or maintain these conditions, the company will not be qualifying:

• The first commercial sale occurred within the last three years or has not yet occurred.
• Have less than 25 full-time employees.
• Carry out a qualifying trade.
• Gross assets less than £350,000.
• Have not raised investment through the Enterprise Investment Scheme (EIS) or from a Venture Capital Trust (VCT).
• The company cannot control another company other than a qualifying subsidiary.
• The company cannot be controlled by another company, meaning another company should not own over 49% of the company’s shares. Another company must not have controlled the company since the company's date of incorporation.
• Not be listed on a recognised stock exchange, excluding the Alternative Investment Market.
• A permanent establishment in the UK.
• Maximum £250,000 SEIS investment.
• Be able to demonstrate growth and development in the future.
• Shares will be full-risk ordinary shares with no preferential arrangements in place.
• There must be no capital preservation provisions such as joint venture partnerships in place.

Before the company issues shares, it must have less than 25 full-time employees to qualify for SEIS. HMRC will confirm the number of full-time employees the company has at the time of investment; they will look at its PAYE payroll scheme to determine this.

The company should include the number of employees in their cover letter as part of their application and whether they plan to hire additional employees following the investment. Be aware directors, subcontractors and consultants are not employees, so don't include them in employee numbers.

Companies must either exist to carry out a qualifying trade or be the parent company of a trading group that conducts qualifying trades. There must be no arrangements for the company to become a subsidiary of, or be controlled by, another company.

A trading group is a group that, directly or indirectly, owns more than 50% of the shares of each subsidiary held as a member of the group. Still, any subsidiary employing any of the money raised by the issue of shares must be a qualifying 90% owned subsidiary. Non-qualifying trading activities must not be a substantial part of the group's overall trade. HMRC classified substantial as 20% of the overall trade. Companies will have to demonstrate how its non-qualifying trade is not substantial in its application. Companies should determine whether they can stay below the 20% mark as they will need to maintain this until after the three-year minimum holding period.

Most trades are qualifying trades for SEIS purposes, but the following are excluded:

• Dealing in the land, in commodities or futures or shares, securities or other financial instruments;
• Dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;
• Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
• Leasing (including letting ships on charter or other assets on hire);
• Receiving royalties or licence fees (subject to the exception relating to self-generated intellectual property);
• Providing legal or accountancy services;
• Farming and market gardening;
• Holding, managing or occupying woodlands, any other forestry activities or timber production;
• Property development;
• shipbuilding;
• producing coal and/or steel;
• Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment;
• Operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home;
• Generation or export of electricity or power, both renewable and non-renewable;
• Production of gas or fuel; and
• Providing services to another person where that person's trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services.

HMRC requires companies applying for SEIS to be independent; another company must not control the company. HMRC will assess control in terms of ownership and if the potential controller is a creditor of the company.

When issued, SEIS shares must be paid in full and in the company's bank account. When submitting the company's SEIS1 application, the company will also submit a copy of their bank statement demonstrating the shares were paid in full before they were issued. SEIS qualifying shares must be full-risk ordinary shares with no preferential or redemption rights or carry special rights to company assets.

There must be no arrangement in place for capital preservation or pre-arranged exits for investors to get their money back. Furthermore, HMRC will not accept any reciprocal arrangements.

Each application for SEIS typically takes a maximum of eight weeks to approve; however, typically, they do come back much quicker than this. However, this can depend on whether HMRC has any questions about the application. HMRC may have questions seeking further clarification on whether a company meet’s one or more of the qualifying conditions, which can delay being granted SEIS advance assurance. Depending on whether a company goes through advance assurance, there are four stages to the process:

Advance Assurance

Companies applying for SEIS are not required to go through advance assurance. Still, it is recommended to ensure there are no surprises for a company or its investors when investment is received. Not all companies will file for advance assurance, making a company more attractive to prospective investors. Advance assurance is essentially “pre-approval” from HMRC that the company meets the qualifying conditions. Before starting the application, a company should have the following documentation and information:

• A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN).
• Latest company accounts and any accounts for any subsidiaries, if applicable.
• The business plan, including financial forecasts.
• Details on how the company will use the funds raised under SEIS.
• An explanation of how the company meets the risk to capital condition.
• A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
• An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes to be made.
• Details of any shareholder agreement or any other subscription agreement the company intends on establishing.
• The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors, if applicable.
• Information on any financial support received by the company that constitutes EU State Aid.

Once a company has all the above documentation, it can then begin filing for the advance assurance with HMRC. Once this has been filed, HMRC may come back with questions regarding details in the application to ensure that all conditions are met and no disqualifying activities are occurring. If successful, following this HMRC will grant the company a provisional acceptance of the company’s eligibility for SEIS. Companies can then take this provisional acceptance to prospective investors to encourage them to invest.

SEIS1

Companies that apply for advance assurance will have a quicker and simpler application process when submitting their EIS1. This is due to having already provided the necessary documentation needed by HMRC and will therefore only need to provide documentation for any changes in the business and the issuance of shares. However, if a company has not sought advance assurance before issuing shares, they will need to provide more information for their EIS1 compliance statement.

• A valid Unique Tax Reference (UTR) and a Company Reference Number (CRN).
• Latest company accounts and any accounts for any subsidiaries.
• The business plan, including financial forecasts.
• Details on how the company will use the funds raised under SEIS.
• An explanation of how you meet the risk to capital condition
• A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received.
• An up-to-date copy of the Memorandum and Articles of Association, with a detailed explanation of any changes to be made.
• Details of any shareholder agreement or any other subscription agreement the company intends on establishing.
• The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fundraising or offer to be issued to potential investors.
• Information on any financial support received by the company that constitutes EU State Aid.
• A bank statement demonstrating the shares being paid in full.

The SEIS1 form must be submitted every time the company issues SEIS shares and should be submitted within two years in which the shares were issued; otherwise, investors will not receive their tax reliefs.

SEIS2

When HMRC approves the application,  the company will receive a SEIS2; this is essentially confirmation from HMRC. This lets companies know that the shares they issued have been authorised, and SEIS3 forms can be issued to the investors recorded in the SEIS1 application.

The Company will need to have spent at least 70% of the money or traded at least four months to submit this application. HMRC constitute the trading element as making or trying to make a sale. 

SEIS3

Once a company receives confirmation from HMRC in the form of a SEIS2, they can then issue SEIS3s. The company uses the information from the SEIS2 document to fill out the SEIS3 form, such as the Unique Investment Reference (UIR) and the termination date for the shares. The SEIS3 form will need to be authorised by both a company representative and the investor before being submitted to HMRC.

Following the completion of the SEIS process, it is up to the SEIS qualifying company and its investors to stay qualifying throughout the three-year holding period. Furthermore, if the company raises additional investment through SEIS, they will have to do the SEIS1/SEIS2/SEIS3 process for each round of funding.

EIS

If the company qualifies for SEIS, it also qualifies for EIS. For more information on the Enterprise Investment Scheme (SEIS), look at Sapphire's EIS Pillar Page, Learning Centre or MoneyLab Blog.

Disclaimer

Please note that this is only a condensed summary of the taxation legislation and should not be construed as constituting advice that a potential investor should obtain from his or her own investment or taxation adviser. The value of any tax relief will depend on the individual circumstances of investors.

Sapphire Capital Partners LLP does not give tax advice and recommends that you consult a tax adviser if you are in any doubt about any of the technical aspects of the SEIS legislation.