This guide contains the main principles and characteristics of EIS and SEIS schemes.
Whether you’re thinking of investing or plan to offer shares that would be eligible for these schemes, we strongly recommend that you take expert tax and legal advice. This will ensure that you optimise all the opportunities available to you, that you can smoothly manage the entire process of application through to distribution to shareholders of the relevant certificates, and that you can avoid inadvertently disqualifying your business during the share issue process and afterwards.
If you’re looking for investment to fund your small business, you may have heard of the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
These are tax initiatives put in place by the government for investors, encouraging them to invest in startups and small businesses at an early stage, by helping to reduce the financial risk that these investors face if that business doesn’t succeed.
In a nutshell, investors can offset up to 50% (30% in the case of EIS) of the value of their investment against their tax liability in a given time frame.
So, while an investment may still be called a gamble (because investing doesn’t guarantee the growth in value of your stake, or even your money back), the risk involved is substantially lessened, and the reward is less tax.
Both schemes are available to qualifying private limited companies that are not more than 7 years past the date of their first commercial sale.
Founders and their spouses are not eligible for either type of relief. Investors must be investing in their personal capacity and not via a company.
To help you find out more about these two government schemes, we’ve created this helpful guide to answer some of the most commonly asked questions.
(To find out more about how to promote the opportunity to invest in your business, take a look at our guide to promoting investment in your business. There are some very strict and financially regulated rules around investment activity promotions, and they apply to startups and small businesses as much as to larger organisations. You may also be interested in our more general guide to your financing options.)
What’s the difference between SEIS and EIS?
The biggest difference between the two schemes is the amount of tax relief to which they each entitle the investors.
The SEIS arrangements entitle investors to tax relief at a value of 50% of their SEIS investment.
So if an investor invests £30,000 in an SEIS qualifying business, they can off-set £15,000 against their next, or last, income tax bill.
A business can only ever offer up to £150,000 worth of shares for which SEIS relief is available (i.e. it is a one-off event), and the business must be pre-approved by HMRC before being able to make that offer of shares.
The investor can invest up to £100,000 in SEIS shares in any one financial year. The shares can be held in different companies.
There may be other tax benefits available too. An investor who qualifies for income tax relief on SEIS shares is also entitled to claim capital gains tax (CGT) relief on a later sale of those shares, as long as they have held those shares for more than 3 years.
The investor may also be able to off-set up to half of the value of an investment in SEIS shares against their capital gains tax liability for the sale of any asset that is made in the same tax year that the SEIS investment in shares is made.
EIS eligible investors can off-set 30% of their EIS-qualifying investment against their income tax bill.
So, if an investor invests £120,000 in an EIS qualifying business, £36,000 can be off-set against the investor’s next or last tax bill.
The maximum cap on EIS investments that an investor can make in any one tax year is £1m. The shares can be held in different companies.
There is a higher limit on how many shares can be offered by a business under the EIS scheme: up to £5m in a 12-month period (and if an SEIS round has also taken place, this will count towards that £5m total). Again, the business must be pre-approved by HMRC before being able to make that offer.
Other forms of tax relief may also be available to the investor. Like SEIS investors, an investor who qualifies for income tax relief on EIS shares is also entitled to claim capital gains tax (CGT) relief on a later sale of those shares, provided they’ve been owned for more than 3 years.
The investor may also be entitled to defer his/her capital gains tax liability on the sale of any asset in the same year as an investment in EIS qualifying shares is made. There are time limits on the length of that deferral.
Many new businesses will start by offering investors SEIS relief (where their relevant investors are appropriately positioned to take advantage of it – a startup’s friends and family investors may welcome this prospect), and then move on to EIS after that. You can offer them both in the same fundraising round. But you must offer the SEIS shares first.
In any event, a first-come-first-served approach often works well here. Since SEIS offers more favourable investor benefits, this can create a little bit of ‘gold rush’ for the company offering the shares and give them an early boost that can provide confidence to later and larger investors.
How do you apply for SEIS and/or EIS status?
For both EIS and SEIS relief applications, the process with HMRC breaks down into three main stages. (Indeed, you can apply for both types of relief at the same time and on the same form. HMRC will often grant them together)
Application by the business for a pre-approved confirmation of eligibility by HMRC, called ‘advance assurance’. Applications are made by the business on form EIS-SEIS(AA).
You will need to submit a business plan, financial information and a variety of other prescribed material with your application, to demonstrate a serious commitment to operating a business that is capable of responsibly offering shares to investors.
When you apply, you must use the form that HMRC provides, but you can send it with an accompanying cover letter if you want to provide further explanations about the stage that you are at and your intentions. HMRC will be interested particularly to understand how you intend to spend the raised funds. You can find out more about all of these requirements here.
And remember that this is a tax clearance document, so HMRC can withdraw its advance approval, if you subsequently don’t operate according to the information that you’ve provided in your application.
The process takes around 3-6 weeks once you’ve submitted your application. There’s no fee to apply and you can do it yourself relatively easily, but it is worth ensuring you have a good tax adviser to hand, as they’ll be well-placed to help you navigate steps 2 and 3 below.
2. Advanced Assurance statement
If your application is approved, HMRC will provide you with a statement that can be shared with your interested investors, confirming that you have been pre-approved to tell investors that their investment is likely to qualify.
You will also need to abide by particular conditions, including the manner in which you promote shares to your target investors, to ensure that you do not disqualify the business from receiving HMRC’s ultimate approval of your eligibility to offer the relief.
3. Compliance statement and approval certificates
Once you’ve issued the shares (you don’t need to have raised the full amount you originally indicated to HMRC) and you’ve satisfied the conditions prescribed by HMRC, you’ll then formally apply for approval, called requesting ‘a compliance statement’. You use form SEIS1 and/or EIS1 for this.
If HMRC is satisfied that the conditions, are met, they’ll issue you with two types of certificate, one of which you keep (Form SEIS2 and/or EIS2) and the other you pass on to your investors (SEIS3 and/or EIS3), so that they can use it to claim their tax relief.
Investors can claim their tax relief by entering the amount they invested (up to the maximum allowed) on their tax returns, along with the name of the company, date of issue, the name of HMRC office that’s authorising the form, and the HMRC reference number.
Applying for SEIS or EIS – what are the conditions?
There are some key conditions you’ll have to meet:
The fundraising objectives
These differ very slightly between the two schemes.
1. The company must exist wholly to carrying on a qualifying business activity (a new one in the case of SEIS shares – new being defined as an activity that the company has been doing for less than 2 years)
2. The shares must be issued to fund the qualifying business activity. (In the case of EIS shares, this condition also includes the requirement that shares are issued to promote the businesses growth and development of the company issuing the shares) AND
3. For EIS: The money raised must be spent on the qualifying business activity within two years of the share issue or the commencement of the qualifying trade if later, OR
For SEIS: the money raised must be spent within three years of the relevant share issue and again, only on the qualifying business activity
A qualifying business activity
Most trades will qualify, including any research and development which will lead to a qualifying trade, as long as the business is conducted on a commercial basis with a view to the realisation of profits
There are a number of excluded activities, however. You can find an up-to-date and full list of them here. They include, for example, activities involving:
• Coal or steel production
• Farming or market gardening
• Leasing activities
• Licensing activities that generate fees, (although if your company has created an intangible asset, e.g. software that you licence to others, you will still be eligible)
• Legal, accountancy or financial services
• Property development
• Running a hotel
• Running a nursing home
• Generation of electricity, heat, gas or fuel
Type of shares
For both SEIS and EIS share issues, you must be offering non-redeemable, ordinary shares.
During the 3-year period from their date of issue to your investors (or from the date of the company carrying on trading activity), these shares must also not carry preferential rights to dividends, to any assets on the winding up of the company and/or to any redemption rights.
Age of the business – the initial investing period
For both EIS and SEIS, a minimum company age condition must also be met. This is met if the shares are issued in the ‘initial investing period’, which is 7 years from the date of the first commercial sale. Where the fundraising will take place before the company’s first commercial sale, the time limit still runs from the date of the company’s first commercial sale.
For SEIS share issues, the value of the company’s gross assets must not exceed £200,000 immediately before the shares are issued.
For EIS share issues, the value of the company’s gross assets must not exceed £15 million immediately before the shares are issued and £16 million immediately afterwards.
Company size – by employee numbers
For EIS, there must be fewer than 250 full-time equivalent employees at the time of the issue.
For SEIS, there must be fewer than 25 full-time equivalent employees at the time of issue.
Rules for pre-arranged exits - beware
SEIS or EIS share issues must not include any arrangements for any of the following:
• Repurchase, exchange or other disposal or the EIS shares or other shares in your company
• The cessation of trade or the disposal of assets by your company or by a person ‘connected’ (see below) with your company and which are designed to reduce the investment risk
As such, any planned exits by any of the investors (such as an option for you to repurchase their shares after a period of time) could affect the company’s ability to qualify for SEIS or EIS relief.
The company must:
• not be under the control of another company, and there must not be any arrangements for it to become controlled by another company at the time of the share issue. A holding company may be inserted for commercial reasons in a share for share exchange and, as long as the relevant conditions are met, tax relief is transferred to the new shares. See VCM16030 for a summary of the conditions
• only have qualifying subsidiaries. A qualifying subsidiary is one in which more than 50% of the shares are owned by the parent, and which is not controlled by another company. Property management subsidiaries must be at least 90% owned by the parent to be qualifying subsidiaries
In these cases, there may be additional requirements that need to be, and we strongly recommend taking expert advice.
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