What is Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), and who is eligible?
The Seed Enterprise Investment Scheme (SEIS), and the Enterprise Investment Scheme (EIS) were created to incentivise investment in early stage businesses. They are HMRC venture capital schemes designed to raise money and stimulate growth of the company’s long-term trade.
These schemes can make your business more attractive to investors. This is because when an investor buys new shares in an EIS / SEIS qualifying business, they may be entitled to receive some form of tax relief. Because of this, many investors will purposefully seek out SEIS / EIS qualifying businesses for investment.
What’s the difference between SEIS and EIS?
SEIS focuses on helping fund very early stage businesses and concepts, which might not even be in the market yet. An SEIS qualifying company must be:
- A ‘very small’ private company that has been trading for less than two years, although it is looking likely this will increase to three years come April 2023
- ‘Very small’ in this instance means that the company has gross assets of less than £200,000, and fewer than 25 full-time equivalent employees
The EIS is designed to help fund companies that are slightly older than SEIS qualifying companies, however are still quite new. An EIS qualifying company must be:
- A ‘small’ private company that, in most cases, has been trading for less than seven years
- ‘Small’ generally means that the company has gross assets of less than £15m, and fewer than 250 full-time equivalent employees
SEIS offers more favourable tax reliefs to the investors in comparison to EIS, as the investments are seen as higher risk. However, EIS relief can still be very advantageous in this sense because in both cases, the company cannot guarantee any form of a return on investment. There must be a genuine risk associated with the investment to qualify, and the new shares themself cannot have any favourable rights attached to them.
Both SEIS and EIS can offer Income Tax relief to investors in the form of a tax reducer (i.e. a certain amount can be taken off their tax liability depending on the amount invested, and what scheme this was under). This is usually either 50% (SEIS) or 30% (EIS) of their total qualifying investment for the year, depending on their taxable positions.
There are also a few different scenarios whereby the investors can also claim Capital Gains Tax relief due to their investments. Depending on a few conditions, there is normally no Capital Gains Tax to pay on the sale of shares under both EIS and SEIS. So, if the shares go up in value and the investors then sell them three years later, the gain will be tax-free. Another possibility is to claim SEIS and EIS reinvestment relief, which can help investors mitigate their Capital Gains Tax liability on the sale of other assets. Despite being similar in name, the reinvestment relief works differently under the two schemes, so if this could be of interest to an investor, they should seek their own tax advice to make sure they qualify.
What is the qualifying criteria for companies under SEIS and EIS?
In addition to the size, gross assets and employee criteria above, you must issue brand new shares in your company to the subscribers in order for the investments to qualify for either scheme. The investment funds must also be received up-front and in cash before any shares are issued.
The company must also:
- Have a permanent establishment in the UK
- Carry out a trade that qualifies. If the company is part of a group, the majority of the group’s activities must be a qualifying trade
- Plan to spend the investment on a qualifying trade
- Not be listed on a recognised stock exchange at the time of investment
- Not be expected to close after completing a project
- Not be controlled by another company
These are a few of the main criteria that a company would need to meet to qualify, however there are further points that will need to be considered and met if you do look to raise investment via one of the schemes. Some of these have been expanded on below:
Additional eligibility and criteria to apply for Seed Enterprise Investment Scheme (SEIS)
SEIS is designed to help very new and small companies start trading. To qualify, a company must:
- Not be a member of a partnership
- Not have gross assets over £200,000 when the shares are issued
- Have fewer than 25 full-time equivalent employees in total when the shares are issued
- Currently, not have carried out the qualifying trade for more than 2 years
- Use the cash received from investment for the trade within 3 years
A company can receive up to a maximum of £150,000 through SEIS investments. This limit will usually include any other de minimis state aid received by the company in the three years up to the investment. The limit is likely to increase to £250,000 from April 2023.
Additional eligibility and criteria to apply for Enterprise Investment Scheme (EIS)
EIS is designed to help small companies to gain investment. To qualify, a company must:
- Not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards
- Have fewer than 250 full-time equivalent employees at the time the shares are issued
- Have not been trading for more than seven years. If you have any subsidiaries (including former subsidiaries) or businesses you’ve acquired, the date of your first commercial sale is the earliest of the group
- Use the cash received from investment for the trade within 2 years
A company cannot raise more than £5 million from any venture capital scheme within 12 months, or more than £12 million from these sources in the company’s lifetime. This includes any money received by any subsidiaries, former subsidiaries or businesses acquired.
How does an investor qualify for SEIS / EIS?
If an investor purchases new shares in your company, and your company is EIS / SEIS qualifying, the investor will receive a certificate confirming their investment. The certificate can then be used when preparing their personal tax returns, however, does not confirm that they themselves are eligible to receive the relief. They will need to seek their own advice when making any claims.
If the investors hold the new EIS / SEIS shares for at least three years, they could benefit from both Income Tax and Capital Gains Tax relief. Holding the shares for fewer than three years may reduce the amount of relief they can receive.
Investors can invest up to a maximum of:
- £1,000,000 per year in EIS-qualifying companies
- £100,000 per year in SEIS-qualifying companies - however this is predicted to increase to £200,000 from April 2023
There are some restrictions. Investors cannot:
- Be connected to the company they are invested in - i.e. cannot be an employee or hold more than 30% of the share capital
- Be an existing shareholder in the company (unless they have had a SEIS/EIS certificate issued previously for these or the shares themselves were subscriber shares)
For SEIS, investors can be directors, however to qualify for EIS, investors cannot be a paid director of the company.
The connection test does extend to family members too, so if the investor's partner or other family member owns more than 30% of the company, for instance, they are considered to be ‘connected' to the investor and this therefore impedes their eligibility.
What is a knowledge intensive company?
If your company qualifies as ‘knowledge intensive’, it can also get more funding through Venture Capital Schemes. You’d be able to raise up to £10m per year, and £20m lifetime investment in the company and any subsidiaries.
- The company and any qualifying subsidiaries must have fewer than 500 full-time equivalent employees when the shares are issued
- Be carrying out work to create intellectual property, and expect the majority of your business to come from this within 10 years
- Or, have 20% of employees carrying out research for at least three years from the date of investment - these employees must be in a role that requires a relevant Master’s of higher degree.
You can read more about what it means to be a knowledge-intensive company here.
How can I find out more about SEIS and EIS?
This is a high-level guide that has been created by Wow, to help you understand if your company could qualify for SEIS or EIS. There are additional intricacies relating to the qualifying conditions, so we recommend investors speak to us or their own tax advisor before committing to any agreements to understand how the reliefs could benefit them specifically.
If you would like to know more about the schemes, including information on how the tax reliefs work or how Wow could assist you with following HMRC’s compliance process, please do not hesitate to get in touch with our tax team via email (firstname.lastname@example.org) or phone (01264 721 670).
March 24 2023 by Peter Czapp
March 24 2023 by Peter Czapp
March 15 2023 by Wow