What is SEIS/EIS?
The Seed Enterprise Investment Scheme and Enterprise Investment Scheme (SEIS/EIS) are two of four venture capital schemes offered by the UK government to help early-stage companies raise money to grow their businesses. The main purpose of this scheme is to encourage SEIS/EIS investment in early-stage startups to help grow their business – whether that be through building out their team or expanding their research & development. The schemes also benefit the investor by offering them tax relief after investing in the SEIS/EIS businesses.
Both schemes have been and continue to be hugely beneficial for spurring the growth & development of early-stage businesses in the UK. It’s become a great incentive for investors as well; UK Business Angels Association states that 90% of angel investors have invested through EIS or SEIS, making the UK one of the most active markets for angel investment.
While the schemes are quite similar, the eligibility requirements differ slightly.
For SEIS, companies must have been trading for less than three years, have less than 25 employees and less than £350,000 in gross assets. For investors, they can invest up to £200,000 per tax year, and thus receive a 50% tax break.
For EIS, this scheme is directed towards slightly larger, medium-sized businesses that have been trading for less than 7 years, have less than 250 employees and less than £15 million in gross assets. If possible, some companies can be eligible for both schemes at the same time. With EIS companies, investors may invest up to £1 million per tax years and receive a 30% tax break in return.
These are just the basics! There’s still plenty that most first-time or early-stage founders don’t know about SEIS/EIS.
We’ve compiled a list of essential things you might not have known about both schemes.
Application requirements
While the application requirements differ slightly for SEIS/EIS, there are a few that are applicable to both.
1)To be eligible for SEIS/EIS, you MUST demonstrate to HMRC that you are meet the Risk to Capital Condition. Although qualifying for SEIS/EIS does make you more attractive as an investment for investors, businesses won’t be considered for the status by HMRC unless they meet the following criteria:
a. Expected growth & development - HMRC looks at three generic indicators in your financial forecast: revenue increases, cost increases, and employee costs increases.
b. Significant risk to invest – businesses need to demonstrate that there is significant risk to investors, for example through a competitor analysis.
2) Whether you are applying for SEIS/EIS, you must NOT be trading or have any plans to be trading on a recognized stock exchange.
3) Before applying, your business must be incorporated in the UK or have a permanent establishment or branch in the UK. If your business is a non-UK company, then you must have a PERMANENT establishment with significant activity in the UK. If you are unable to set up a physical branch in the UK, then you may also be eligible with a UK agent that has the authority to act on behalf of the company.
4) You might be eligible for investment from Knowledge Intensive EIS Funds if your business is a company primarily dedicated to research, development, and innovation rather than immediate company growth.
Receiving investment
5) For qualifying businesses, you CAN receive both SEIS/EIS investment, HOWEVER you must take in SEIS funds first and issue your SEIS shares at least a day before your EIS shares. Shares will not be SEIS eligible if they are issued on the same day as EIS shares. If you do issue both sets of shares on the same day, then you would need to opt for EIS relief on all of them.
6) For SEIS, once you have received the investment, then you must use the money within 3 years of receiving the investment, or within 2 years of the date you started trading.
Limits on money raised
7) While the schemes are intended to help grow your company, there are restrictions to how much you can raise within a year from the schemes themselves and other HMRC appointed schemes. Your company cannot raise more than £5 million in total in any 12-month period from:
EIS
Venture capital trusts
SEIS
Social investment tax relief
8) In addition to the £5 million limit within a 12-month period, your company also cannot raise more than £12 million from these sources in your company’s lifetime.
If your potential investors are looking for proof that your startup will be SEIS/EIS eligible, then you can apply for Advance Assurance with HMRC, where you will need to provide detailed records about your company so you can get your status approved as soon as possible. The SEIS/EIS scheme is an excellent initiative by HMRC to help both early-stage companies and investors with the aim of encouraging innovation and progress in the UK, so find out if you’re eligible today!