Securing investment can be one of the most formidable challenges for startups in the UK. To address this issue, the UK government has established the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), both of which offer substantial tax reliefs to investors. These schemes not only enhance the appeal of investing in higher-risk startups but also underscore a company’s commitment to regulatory compliance and governance.
This comprehensive guide aims to elucidate the intricacies of EIS and SEIS. It will provide a thorough overview of their potential benefits, the eligibility criteria for both startups and investors, and detailed steps for navigating the application process. By understanding these schemes, you can better equip your startup to attract the necessary capital for sustainable growth and development.
What are EIS and SEIS?
Enterprise Investment Scheme (EIS):
- Established in 1994, EIS is a UK government initiative designed to encourage investment in small, high-risk companies by offering significant tax reliefs.
- Investors in EIS-eligible companies can claim up to 30% income tax relief on investments up to £1 million per tax year.
- Additionally, capital gains tax (CGT) is deferred on the gains from the disposal of assets, providing another tax advantage for investors.
- EIS also provides exemption from CGT on gains made from the sale of EIS shares, provided they are held for at least 3 years.
- Since its inception, EIS has helped startups raise over £20 billion across 40,000 companies, making it an essential funding route for innovative businesses in the UK.
Seed Enterprise Investment Scheme (SEIS):
- Launched in 2012, SEIS focuses on encouraging investment in very early-stage companies, offering even more generous tax reliefs than EIS.
- Investors can claim 50% income tax relief on investments up to £100,000 per tax year, making it a highly attractive option for investors.
- SEIS also offers capital gains tax exemption on any profits made from the sale of SEIS shares if the shares are held for at least three years.
- Unlike EIS, which is aimed at slightly more mature companies, SEIS is specifically designed for companies raising up to £250,000 in funding, making it ideal for startups at their earliest stages.
Eligibility Criteria for Startups
1. Share Types:
- Only ordinary shares without preferential rights qualify under EIS and SEIS. These shares must provide full voting rights, and dividends must not be preferential.
2. Trading Activities:
- The startup must be involved in a qualifying trade, which excludes certain sectors. The UK government’s guidelines specify that companies involved in activities like banking, property development, and financial services do not qualify for EIS or SEIS.
- Non-qualifying trades also include those involved in legal or accounting services, lobbying, and activities related to fossil fuels, among others.
3. Company Age and Size:
- EIS: Companies must be no more than 7 years old from the first commercial sale of their product or service.
- SEIS: Companies must be less than 2 years old.
In both cases, companies must have:
- Fewer than 250 employees at the time of investment.
- Gross assets not exceeding £15 million for EIS and £200,000 for SEIS before the investment.
4. Funds Usage:
The funds raised through EIS/SEIS must be used for qualifying business activities, such as research and development, marketing, or the expansion of the company’s operations. Startups are required to use the funds within a 3-year period from the date of investment.
The funds should be used to:
- Develop new products or services.
- Hire employees.
- Expand operations into new markets.
5. Other Considerations:
- A company can only raise a limited amount of capital through EIS and SEIS. For EIS, a company can raise up to £5 million per year, while for SEIS, the maximum is £250,000.
- The company must not be listed on a stock exchange at the time of investment.
- At the time of investment, the company must not have more than 50% of its assets used for non-trading activities.
Benefits of EIS/SEIS
For Startups:
- Attracting Investment: EIS and SEIS tax reliefs reduce the financial risk for investors, making it easier for startups to raise capital. This is particularly beneficial for startups in high-risk sectors such as tech, biotech, and green energy.
- Boosting Credibility: Being EIS or SEIS approved demonstrates to investors that your startup is committed to meeting rigorous regulatory standards. This can increase investor confidence and provide an added layer of legitimacy.
- Access to Experienced Investors: EIS/SEIS-qualified investors are often experienced entrepreneurs or angel investors who can provide more than just capital—they can offer valuable guidance and mentorship to help scale your business.
For Investors:
- Income Tax Relief: Investors can claim 30% income tax relief under EIS, and 50% income tax relief under SEIS, making these schemes highly attractive from a tax-planning perspective.
- Capital Gains Tax Exemption: Gains made on EIS or SEIS investments after holding shares for at least 3 years are exempt from CGT.
- Loss Relief: If the investment fails, investors can claim loss relief against their income, reducing their overall tax burden.
Application Process
1. Advance Assurance
- A completed application form.
- A business plan detailing how the funds will be used.
- Financial information and proof of compliance with the requirements of EIS/SEIS.
Once approved, the company can share the Advance Assurance with potential investors, giving them confidence that they will be eligible for tax relief.
2. Issuing Shares
After securing investment, the startup must issue qualifying ordinary shares to investors. It’s important to ensure these shares meet the eligibility criteria outlined by the scheme, including full voting rights and no preferential treatment.
3. Compliance Statement
Once the investment has been made and the shares issued, the startup must submit a compliance statement to HMRC to confirm the details of the investment and that all requirements have been met. This must be submitted within 2 years of the investment date.
4. Claiming Tax Relief
Once HMRC processes the compliance statement, investors can claim the tax reliefs on their self-assessment tax returns. For EIS, this includes up to 30% income tax relief and exemption from capital gains tax on gains after three years.
Conclusion
For startups in the UK, taking advantage of the EIS and SEIS schemes is an invaluable strategy for raising capital while providing investors with significant tax incentives. By meeting the eligibility requirements, companies can not only secure the funding needed to fuel their growth but also attract experienced investors who are motivated by the tax reliefs on offer.
However, navigating the complexities of EIS and SEIS can be challenging. Therefore, it’s crucial for startups to engage with legal and tax professionals who can guide them through the application process and ensure full compliance with the schemes. With proper preparation, EIS and SEIS can serve as powerful tools in securing the investment that drives the success of your startup.