What are the EIS and SEIS Tax Relief Schemes and what do they mean for you?
Making your business successful depends on a lot. Genius ideas, expert advice and relentless perseverance to name a few. But more than anything, at one point or another, you will need to source, raise and sustain investment for your company. To alleviate the financial teething pains of starting a company, the UK government provides two initiatives that startups can apply for – namely the EIS and SEIS investment schemes.
These schemes can be incredibly beneficial to both startups and investors, which can help startups attract greater funding from an earlier stage. Under the EIS and SEIS investment schemes, private investors get a significant tax break as a reward for investing in early-stage, ‘high risk’ companies.
What are EIS and SEIS?
EIS and SEIS are pipelines for early-stage investment into small, young, private UK companies with high-growth potential. There is a widely perceived ‘finance gap’ in this market, meaning many promising businesses often struggle to obtain growth funding.
Entrepreneurs and investors alike should understand that neither SEIS nor EIS are a source of venture capital. They are incentives.
The Government does not provide cash in either programme. Instead, SEIS and EIS provide tax relief to investors who buy shares in qualifying businesses. This aims to make it easier for startups to attract the investment they need.
What is the difference between EIS and SEIS?
The key difference between EIS and SEIS, is that SEIS is for start-ups and very early-stage companies, while EIS is for medium-sized companies in the UK.
There is a greater tax incentive for investors under the SEIS, so if you’re SEIS eligible, that’s what you should apply for.
What are the EIS eligibility criteria for startups?
EIS stands for the Enterprise Investment Scheme.
- medium-sized startups
- Companies that have been trading for less than seven years
- Companies with under 250 employees
- Less than £15 million in gross assets
BENEFITS TO INVESTORS:
- invest up to £1 million per tax year
- receive a 30% tax break in return
- Pay no Capital Gains Tax on any profit arising from the sale of the shares after three years.
Within a single tax year, investors can claim tax relief on income no greater than £1m – providing a tidy savings of £300,000, all because of the EIS.
The major pitfall of the EIS is that it doesn’t offer support for companies who are pre-revenue or pre-trading. That is where the SEIS comes in.
What are the SEIS eligibility criteria for startups?
SEIS stands for the Seed Enterprise Investment Scheme.
- very early-stage companies (trading for under two years)
- companies with under 25 employees
- Companies with less than £200,000 in gross assets.
BENEFITS TO INVESTORS:
- invest up to £100,000 per tax year
- receive a 50% tax break in return
- Pay no Capital Gains Tax exemption on any profits that arise from the sale of shares after three years.
HMRC have a list of excluded activities for startups. Not all companies fit into a category exactly, but the list indicates areas that require further analysis. Companies are excluded from raising money under both the SEIS and EIS schemes if a substantial (20% +) of their trade activity is made up of one or more of the listed excluded activities.
Limits to the EIS Scheme
There are a number of criteria you and your investors are required to meet to qualify for the scheme:
- Investors must hold shares for at least three years to be eligible for the relief.
- Your company cannot apply for the scheme if it was founded more than 7 years ago.
- Your company must have below 250 employees.
- You must be trading (operational, with revenue), but private (not registered on any stock exchange)
- The maximum you can raise is £5m a year or £12m across the company’s lifetime to be eligible for EIS shares.
- The investment must be used to grow the company, for example to increase revenue, expand your customer base, hire more employees, among other activities.
There is one thing to note for knowledge-intensive companies (KICs), who undertake research and development as a part of their business operations, or who are developing intellectual property – they, have a slightly different set of rules. A full rundown of eligibility criteria for the EIS scheme can be found here, and for KICs they can be found here.
How do EIS and SEIS benefit investors?
Enabling angel and venture capital investors to benefit from the EIS or SEIS schemes can be a huge draw to a business’s funding round. They are in essence a free money-back voucher for investors and can significantly lower the risk of investors losing their money.
Investors can make up to £100k in SEIS investments per year and up to £1m in EIS investments per year. For knowledge-intensive companies, that upper limit is £2m. For both schemes, investors generally need to hold their shares for a minimum of 3 years to retain the tax relief.
For those founders who have incorporated their businesses but have yet to start making money, the SEIS can help incentivise investors to contribute to the company’s seed funding round.
On the SEIS scheme, businesses can receive a maximum of £150,000, but here investors benefit from a 50% tax relief. The maximum investment by a single investor is £100,000 on this scheme, which means the maximum saving could amount to £50k in a single year.
How do companies apply for EIS or SEIS?
For companies applying to either scheme, it may be useful to check with HMRC whether the potential investment being offered by investors would apply for tax relief. This is known as advance assurance, and it saves time by telling applicants whether they qualify for either scheme.
HMRC require a business plan, financial forecasts, interested investors, details of trading and other administrative and financial documentation to make the assessment.
Finding investment is always a challenge, but for UK-based companies, these UK Government schemes can help entice investors to take a risk and reap large potential gains.