What is SEIS and EIS?

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) can be utilised to attract individuals to make equity investments in early stage, unquoted, companies.

Due to the risk of loss to capital for investors, the attraction comes in the form of tax relief on the amount invested. SEIS is broadly for companies preparing to trade or are within their first 3 years of trading. EIS is for older companies and generally speaking, must be within the first 7 years of their trade (however there are circumstances where this timeframe is extended).

The schemes were initiated by the government to help start-up businesses obtain the vital capital required to help them grow and develop.

Why use SEIS/EIS?

From a company perspective, early stage companies often struggle to raise equity finance. These schemes play a very important role in facilitating capital from private individuals to early stage companies.

From the investors perspective, there are handsome Income Tax and Capital Gains Tax (CGT) reliefs available incentivising them to invest in your company.  

What are the tax reliefs available to investors?

Under the SEIS scheme, investors are entitled to:

  • Income tax relief equal to 50% of the amount invested (maximum investment of £200,000 per tax year).
  • Capital gains tax relief – SEIS shares held for at least three years before being sold are exempt from CGT.
  • Reinvestment relief – investors won’t have to pay CGT on the sale of an asset if all or part of the gain is reinvested in an SEIS-qualifying company. This relief is available on 50% of the investment, providing the investor also receives income tax relief.
  • Loss relief – If the shares are disposed of at a loss, investors can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which the shares were disposed of, or any income of the previous year, instead of being set off against any capital gains.
  • Inheritance tax relief – as long as the shares are held for two years, there would be no IHT liability on SEIS shares following the death of an investor.

Under the EIS scheme, investors are entitled to:

  • Income tax relief equal to 30% of the amount invested ((maximum investment of £1,000,000 per tax year) or £2,000,000 if a KIC)). Shares must be held for at least three years or the income tax relief is clawed back.
  • Capital gains tax relief – EIS shares held for at least three years before being sold are exempt from CGT.
  • Capital gains deferral relief – The payment of CGT on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company during the period of one year before and three years after the gain arose.
  • Loss relief - If the shares are disposed of at a loss, investors can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which the shares were disposed of, or any income of the previous year, instead of being set off against any capital gains.
  • Inheritance tax relief – as long as the shares are held for two years, there would be no IHT liability on EIS shares following the death of an investor.

Qualifying Investors

In order to qualify for all the reliefs noted above, an investor must not be “connected” with the company. This includes:

  • Employees or directors (subject to business angel rules for directors)
  • Investors who hold more than 30% of the company (including associates)
  • Existing shareholders whose shares are not SEIS or EIS qualifying or subscriber shares

(S)EIS Qualifying Companies

All SEIS and EIS investment must be utilised by the company to grow and develop the company.

EIS Companies have to satisfy a number of conditions from the date of the allotment of shares to investors and for the following three years. When the shares are issued, they must:

  • Have fewer than 250 full time equivalent employees
  • Be an unquoted company
  • Have Gross Assets under £15m prior to the share issue, and under £16m after the share issue.
  • Generally, the Company must have been trading for less than seven years from the first commercial sale
  • The shares issued must be ordinary, non-redeemable shares, with no preferential rights to assets in a winding up and limitations on preferential rights to income

On the date of the allotment of shares, and for three years after the allotment, the company must:

  • Not be under the control of another company
  • Have a qualifying trade
  • Have a UK permanent establishment

In addition to the above, the conditions for SEIS are similar, with the following qualifications:

  • Must have fewer than 25 full-time equivalent employees
  • Gross assets of under £350k
  • Trade must be less than 3 years old, and must be genuinely new
  • Must not have raised money under the EIS scheme to date

Investment Amounts

Scheme SEIS EIS EIS: Knowledge Intensive*
Annual Limit* N/A £5m £10m
Lifetime Limit* £250k £12m £20m

*These limits may also be restricted by other risk finance that has been received by the company.

*Knowledge-Intensive Companies (KICs)

There are a number of advantages if a company is knowledge intensive under the EIS rules. They can be:

  • Older: can raise under the EIS rules if it is less than 10 years since the first commercial sale or when annual turnover exceeds £200k. 
  • More employees: must have fewer than 500 full time equivalent employees.
  • Raise more money: Life time limits and annual limits are extended. 
  • Raise more money from one individual: Individual investors can also invest up to £2m from investments in knowledge intensive companies.

To be a knowledge intensive company, the company must meet the operating and innovation conditions:

Operating Condition: Either:

  • At least 15% of costs on R&D in one of the last three years; or, 
  • At least 10% of costs on R&D in each of the last three years; and 

    Innovation Condition: Either 

    Part 1:

    • Is company engaged in creation of IP and
    • Is it reasonable to assume that within 10 years most of the business activity will consist of exploitation of that IP; or Part 2:

    Part 2:

    • At last 20% of the company’s employees are skilled employees (generally masters degree or higher)

    We would recommend that knowledge intensive status is considered should the company need to use the extended limits as noted above, otherwise, the added complexity may risk an application from being rejected.

    How can we help?

    We can help advise on eligibility and liaise with HMRC on the company’s behalf. This includes:

    • Preparation of an advance assurance (prior to the allotment of shares)
    • Advise on existing discussions with HMRC regarding (S)EIS status
    • Complete relevant compliance statements after the investment has completed

    How does the SEIS/EIS process work?

    The following helpful diagram illustrates the 5 key steps from starting your business and deciding that you require funding, to obtaining EIS funding and distributing the relevant forms to investors to allow them to claim favourable tax reliefs.

    Step 1:

    Firstly, the company will require a strong and detailed business plan to demonstrate to HMRC that the company represents an entrepreneurial business that intends to grow its staff headcount, customer base and sales whilst showing that there are no pre-assured income streams that would de-risk the investors investment.

    The company will also need to provide financial forecasts for the next 3-5 years (at least) along with details of any other grant funding provided to date.

    Step 2:

    Typically, the application process is started prior to the share issue as the investor will likely require “advance assurance” that their investment will qualify for SEIS/EIS tax reliefs. As part of the application to HMRC, the following documents will be required:

    • Detailed business plan including financial forecasts
    • Investor pitch deck
    • Latest set of financial accounts (if over 6 months old we would recommend sending management accounts as well)
    • Articles of association
    • Cover letter setting out how the relevant conditions are satisfied

    Steps 3 & 4:

    On the basis that HMRC grant advance assurance, then the company can obtain the funds from its investors and issue the shares. Please note that advance payment or late payment for the shares generally won’t qualify for SEIS/EIS relief.

    Following the fundraise, a compliance statement is to be sent to HMRC to show that the fundraise met the SEIS/EIS conditions.

    Steps 5 and 6:

    Assuming that HMRC are content with the SEIS 1 / EIS 1, then they will issue the company with a SEIS 2 / EIS 2 form which gives the company permission to give the investors certificates to allow them to claim tax relief. This form is called SEIS 3 / EIS 3.

    Summary

    If you are an innovative start-up business with exciting plans to grow the business then our expert team are on hand to help with these venture capital incentive schemes.

    We are happy to guide you through each step of the process to allow you to focus on your business and its future growth plans.