How to Use the EIS/SEIS Tax Schemes
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.
But fear no more. For UK-based companies, the UK Government extends a number of olive branches to founders looking to raise capital for their venture.
As part of Floww’s Get Funded Series, in this article, we take a look at how ambitious founders can utilise the UK Government’s generous tax schemes to help capitalise on their fledgling companies.
The Enterprise Investment Scheme (EIS)
The UK Government recognises that raising capital is no easy feat (especially in the early stages) hence they offer enticing tax relief for start-ups searching for investment.
The EIS is designed to offer tax relief to individual investors who purchase new shares of your company, thereby making it even more enticing to invest in your business idea. If approved, your investors can claim up to 30% off income tax relief on their EIS investment shares.
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.
Limits to the 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 is has been 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 (e.g. increase revenue, expand your customer base, hire more employees, etc…)
- Knowledge-intensive companies (KICs), who undertake more R&D or innovation work, have a slightly different set of rules given the different lines of business.
Ready to apply?
Applications are open all year round and can be submitted to HMRC via this link. Essentially, you must comply with all the limits to the scheme outlined above and provide evidence to HMRC. Once approved, you will receive a certificate known as form EIS3 to share with your investors. They can then start collecting the tax relief bonus!
The Seed Enterprise Investment Scheme (SEIS)
But wait, there’s more!
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.
For those founders who have incorporated their businesses (check out our recent article on how to register your business) but have yet to start making money, the SEIS can help incentivise investors to contribute to the company’s seed funding round.
On the SIES, you can receive a maximum of £150,000 through the scheme, ut 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.
To qualify for the SEIS:
- You must not have more than 25 employees.
- You must have gross assets of no more than £200,000 when new shares are issued.
- Just like on the EIS, the investment made through SEIS shares must be used to grow the company.
- You can be pre-trading or you must not have been trading for more than 2 years to qualify.
Applications work in the same way and can be submitted through this form.
Before you apply for either scheme, it might be useful to check with HMRC whether the potential investment you have been offered would apply for tax relief. This is known as advance assurance, and it’ll save you time by telling you whether you qualify for either scheme.
Here, you must tell HMRC your business plan, financial forecasts, interested investors, details of trading, etc… A full list of the advance assurance criteria can be found here. You’ll need to complete the advance assurance form when you apply for the scheme anyway, so it may be worth getting a head start by completing the advanced assurance application as soon as you have an investment offer.
Finding investment is always a challenge, but for UK-based companies, these UK Government schemes can help to entice investors to take a risk and reap large potential gains!
Be sure to check out more content from Floww’s Get Funded Series for all things start-ups.