SEIS shares explained: HMRC requirements and the Companies Act steps to issue them

If you want your investors to claim tax relief under the Seed Enterprise Investment Scheme (SEIS), the shares you issue to them have to meet HMRC's requirements, and the issue itself has to be done properly under the Companies Act 2006. Get either side wrong and the investor can lose the relief or the shares can be open to challenge. This page walks through both: the HMRC checklist for the shares themselves, and the corporate procedure your company has to follow to issue them.

SEIS share requirements: HMRC checklist

Here are the requirements the shares must meet if you want your investors to benefit from SEIS relief.

• The shares must be fully paid. The investor cannot say "give me the shares now and I will pay you later". When you issue the shares, they must already have been paid for.
• They cannot be redeemable shares. Redeemable shares are shares where either the company or the shareholder can notify the other and say "I would like you to buy my shares now". That right cannot exist, and especially not in favour of the shareholder. See redeemable shares explained for what these are.
• They cannot carry special rights to the company's assets. The shares cannot have priority over the assets of the company if it goes into liquidation. That kind of preference would let the investor minimise their risk, which is against the purpose of the scheme. SEIS is designed to reward investors who genuinely take on the risk of an early-stage company.
• There must be no special arrangements. This includes, for example, arrangements to guarantee or protect the investment, arrangements to sell the shares at the end of the investment period, or structuring your activities so the investor benefits in a way the scheme does not intend. I read this as a reference to the general anti-avoidance regulation, often called the GAAR, and its purpose is to stop the scheme being used for tax avoidance.
• No reciprocal investment. There cannot be an arrangement where the investor invests in your company and, in return, you invest in theirs.
• A genuine commercial reason. The arrangement cannot be solely for the purpose of avoiding tax. There has to be a real commercial reason for the share issue.

Those are HMRC's requirements for the shares if you want your investors to get the relief. The common thread running through all of them is risk. SEIS exists to encourage people to put money into very early-stage companies, and the tax relief is the reward for taking that risk. Every item on the list is there to stop the investor engineering their way out of it, whether by getting their money back on demand, by jumping the queue on a liquidation, or by having someone guarantee the investment on the side.

In practice, the points I see cause problems are the ones that get negotiated into a deal without anyone thinking about SEIS. An investor asks for a put option so they can sell their shares back after three years. A founder offers a preference on a winding up to make the investment feel safer. Both sound reasonable in a term sheet and both can take the shares outside the scheme. If SEIS relief is part of the pitch to investors, every term has to be checked against this list before it is agreed.

But meeting HMRC's requirements is only half the job. The shares also have to be legally valid, and that is a separate question governed by the Companies Act 2006. An investor can hold shares that tick every box on the HMRC checklist and still have a problem if the company never issued them properly.

Companies Act steps to issue SEIS shares

In short, the Companies Act requires that a procedure is followed when a company issues shares, and that there is documentation to evidence that the procedure was followed. These are the steps.

• Step 1: board meeting and board minutes. The directors, the board, must hold a board meeting to approve the share issue, and that meeting must be evidenced by board minutes. See how to draft board minutes.
• Step 2: shareholder resolution, if needed. You may need to pass a resolution of the shareholders, especially if there are any pre-emption rights. Pre-emption rights give existing shareholders a right of first refusal, the right to buy the new shares before anyone else. They typically exist, because they are in the Companies Act itself, and they might also be in your articles of association. Where they apply, the shareholders usually need to deal with them before the shares can go to the investor.
• Step 3: receive the money. The investment has to be received. Remember that for SEIS the shares must be fully paid when they are issued, so this has to happen before the shares are allotted.
• Step 4: issue share certificates. Once the decisions have been passed and the money received, issue share certificates to the investors.
• Step 5: update the internal registers. Update your company's statutory registers, especially the register of members. This is usually a spreadsheet recording who the shareholders are and information about them, such as their correspondence address.
• Step 6: file at Companies House. Submit the relevant information, usually a form, to Companies House to reflect the change in the company's share capital.

The sequence matters as much as the steps themselves. The board approves, the shareholders clear the way if pre-emption rights apply, the money arrives, and only then are the shares issued and recorded. If you skip a step, or do them in the wrong order, you may end up with investors who have paid their money but do not validly hold the shares they were promised. That is a problem in its own right, and it is a problem for the SEIS claim, because the relief depends on a valid issue of qualifying shares.

Does your company qualify for SEIS?

Everything above assumes your company is eligible for the scheme in the first place. Before you issue shares to investors on the basis that they will get SEIS relief, make sure the company itself qualifies. The requirements for the shares and the requirements for the company are two different sets of conditions, and both have to be met. I cover the company side and the application process in how to apply for SEIS.

Next steps

Run through the HMRC checklist before you agree terms with any investor, particularly on redeemability, preferential rights and side arrangements, because those are the points that tend to be negotiated into a deal without anyone realising they break the scheme. Then follow the Companies Act procedure step by step and keep the paperwork. The shares will normally be issued under a share subscription agreement, which I cover in share subscription agreement explained. If you want the corporate procedure handled properly, speak to a corporate solicitor before the round closes.