What are SEIS and EIS?
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two of the four venture capital schemes available in the UK. These government-backed initiatives are designed to stimulate private investment in newly established, high-risk, high-potential UK companies by offering significant tax relief. For startups aiming to attract investment, these schemes are crucial; approximately 90% of angel investors have utilised SEIS or EIS, with 80% of their portfolios comprised of these schemes, according to the UK Business Angels Association.
According to the Enterprise Investment Scheme Association, in the 2022-2023 period, approximately 1,440 companies raised funds under the SEIS scheme for the first time, securing £137 million in investment. During the same period, around 1,280 new EIS companies raised approximately £436 million.
SEIS vs EIS: What’s the Difference?
Both schemes are designed to incentivise private investors to fund early-stage companies by providing tax relief, thereby reducing their financial exposure to high-risk ventures. Generally speaking, the SEIS is designed for very early-stage companies, while the EIS is intended for medium-sized startups with an established track record.
The Seed Enterprise Investment Scheme (SEIS)
The SEIS is tailored for very early-stage companies that have been trading for less than three years. It comes with specific restrictions, including a maximum of 25 employees and gross assets of less than £350,000. Individual investors can invest up to £200,000 per tax year and receive a 50% tax break. Additionally, investors benefit from a Capital Gains Tax exemption on any profits from the sale of shares after three years. Given the better tax incentives under SEIS, eligible startups should prioritise this scheme. Notably, companies can utilise both SEIS and EIS concurrently.
SEIS Eligibility:
- Must be a new company or trading for less than three years.
- Must qualify as a trade or business.
- Must be established in the UK.
- Cannot be trading on a recognised stock exchange at the time of the share issue.
- Must not be preparing to become a quoted company or a subsidiary of one at the time of the share issue.
- Cannot control another company unless it is a qualifying subsidiary.
- Must not be controlled by another company since incorporation.
- Must have gross assets of less than £200,000 when the shares are issued.
- Cannot be a member of a partnership.
- Must have fewer than 25 full-time equivalent employees when the shares are issued.
Enterprise Investment Scheme (EIS)
The EIS is designed for medium-sized startups that have been trading for less than seven years, with fewer than 250 employees and gross assets under £15 million. This scheme allows individuals to invest up to £1 million per tax year and receive a 30% tax break. Similar to SEIS, investors are exempt from Capital Gains Tax on profits from shares sold after three years. Both SEIS and EIS also provide relief from inheritance tax on shares held for a minimum of two years. If SEIS/EIS shares are sold at a loss, investors may offset the loss against their Capital Gains Tax (loss relief).
EIS Eligibility:
- Must be a new company or trading for less than seven years (ten for Knowledge Intensive Companies).
- Must qualify as a trade or business.
- Must be established in the UK.
- Cannot be trading on a recognised stock exchange at the time of the share issue.
- Must not be preparing to become a quoted company or a subsidiary of one at the time of the share issue.
- Cannot control another company unless it is a qualifying subsidiary.
- Must not be controlled by another company or have more than 50% of its shares controlled by another company.
- Must have gross assets of less than £15 million when the shares are issued.
- Must have fewer than 250 full-time equivalent employees when the shares are issued (500 employees for Knowledge Intensive Companies).
Note: if a company wants to benefit from SEIS, it must do so before raising funds through EIS or a VCT. Once EIS or VCT investments have been made, the company can no longer use SEIS.
How much can I raise under SEIS and EIS??
To qualify for tax relief, there are maximum investment limits for companies under SEIS and EIS:
- SEIS: Up to £250,000 total.
- EIS: £5 million in one year and up to £12 million total, or £20 million for Knowledge Intensive Companies.
If your company has already received de minimis state aid in the last three years, it may affect the amount of SEIS investment you can receive. The amount of de minimis state aid your company has received counts toward the overall SEIS investment limit. The total amount of SEIS funding plus any de minimis state aid received cannot exceed the SEIS limit (which is £250,000 as of April 2023). This is to ensure compliance with state aid rules, which limit the amount of aid a company can receive under certain exemptions.
How much can an investor invest under SEIS and EIS??
Investors can contribute different amounts within each scheme:
- SEIS: Up to £200,000 per tax year (individual investors only; no corporations). SEIS companies can accept no more than £250,000 in total SEIS funding.
- EIS: Up to £1 million per tax year or £2 million for Knowledge Intensive Companies. Both individual and corporate investors are eligible, though corporations do not receive tax relief on their investments. EIS companies can accept no more than £12 million in total EIS funding (£20 million for Knowledge Intensive Companies).
Note: An individual investing through SEIS or EIS must not own more than 30% of the company’s shares and cannot be employed by the company. Directors are eligible to invest under SEIS. For EIS, the rules are more complex: unpaid directors can qualify for EIS relief, while paid directors may be eligible if they satisfy the ‘business angel’ criteria. Generally, an investor can be appointed as a director after shares have been issued, but not before.
What Can Funds Be Used For?
Both SEIS and EIS have specific rules governing the use of raised funds to ensure they are directed towards qualifying business activities:
- SEIS: Funds must be spent within three years of investment.
- EIS: Funds must be spent within two years of investment.
Funds raised through these schemes must be utilised for one of the following purposes:
- A qualifying trade
- Preparing to carry out a qualifying trade
- Research and development that is expected to lead to a qualifying trade
SEIS and EIS investments have specific rules regarding share purchases to ensure funds are used for business growth. SEIS funds can only be used to buy shares in a qualifying 90% subsidiary that will utilise the funds for qualifying business activities, while EIS funds cannot be used to purchase shares in any company.
Can I raise SEIS and EIS Funding at the same time?
Yes, a business can raise both SEIS and EIS funding, but specific conditions must be met. First, a company must raise its initial funds through SEIS before transitioning to EIS; starting with EIS and then switching to SEIS is not allowed.
The SEIS limit is £250,000, and once this limit is reached, the company can seek additional funding through EIS. Importantly, HMRC regulations require that SEIS and EIS shares cannot be issued on the same day. SEIS shares must be issued first, followed by EIS shares at least one day later. By adhering to these guidelines, businesses can effectively leverage both funding options for growth while complying with regulatory rules.
What is Advance Assurance (AA) for SEIS/EIS?
When preparing for a funding round, one of the first questions you may face from potential investors is whether you have SEIS/EIS Advance Assurance.
Advance Assurance (AA) is a process through which businesses can obtain confirmation from HMRC that they are likely to qualify for SEIS or EIS. While it doesn’t guarantee eligibility, this assurance provides potential investors with confidence that their investment will be eligible for the associated tax reliefs. It’s important to note that separate applications must be made for each proposed investment requiring advance assurance.
To apply for AA, companies need to provide:
- The amount of money you plan to raise
- A comprehensive business plan and financial forecasts
- A copy of the latest accounts, if available
- Details of the companies that will utilise the investments
- An overview of all trading activities and expected expenditures
- An up-to-date copy of the memorandum and articles of association, along with any anticipated changes
- A copy of the register of members from the date of the advance assurance application
- The latest draft of any documents used to explain your proposal to potential investors
- Details of any other agreements between the company and shareholders or Venture Capital Trusts
- A signed letter from one of your directors or trustees, especially if you have an agent acting on your behalf
- Any additional documents to demonstrate qualification for the scheme
HMRC will contact the applicant after making their decision. If the outcome is positive, they will provide a statement indicating that the investment is likely to qualify for SEIS or EIS, which can be presented to potential investors. However, it's crucial to note that the term "likely" indicates eligibility, not a guarantee. If HMRC declines, they will typically provide reasons for the decision. The adjudication process can take up to eight weeks.
How to apply for SEIS and EIS Advance Assurance (AA)?
Start with Advance Assurance (AA) by applying directly through the HMRC website. While this step is not mandatory, it is highly recommended as the first action in the process. Advance Assurance requires less detailed information compared to the full SEIS/EIS application and primarily focuses on your company's eligibility and proposed investment plans.
When applying for Advance Assurance, you do not need to have secured actual investors. However, you should be able to provide information about at least one potential investor. This detail can be updated later and serves to demonstrate your genuine intention to raise funds, indicating that you are serious about your fundraising efforts.
The full SEIS/EIS application, on the other hand, comes after you've raised funds and issued shares. It involves submitting detailed compliance statements (SEIS1/EIS1 forms) to HMRC and requires more comprehensive information about the actual investments received.
Next Steps After Closing Your Funding Round
After closing your funding round and issuing shares and share certificates to investors, you must complete essential compliance steps.
First, submit the appropriate compliance statement to HMRC: an SEIS1 form for Seed Enterprise Investment Scheme investments or an EIS1 form for Enterprise Investment Scheme investments. This submission is necessary for your investors to claim their SEIS or EIS tax relief.
Once HMRC approves your SEIS/EIS compliance, they will provide a unique investment reference number for your company. Following this approval, you can issue the relevant certificates to your investors—SEIS3 certificates for SEIS investors and EIS3 certificates for EIS investors. These certificates allow your investors to claim their respective tax reliefs.
Conclusion
SEIS and EIS are compelling tools for UK startups looking to raise capital by offering investors attractive tax incentives. Understanding and leveraging these schemes can dramatically increase your chances of securing the investment needed to grow your venture.
If you need assistance or would like to consult on SEIS and EIS, get in touch with our team, and we will refer you to one of our trusted partners.
