A Brief Guide To SEIS and EIS Investments
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are tax reliefs benefits the UK government offers in regard to investments in higher-risk early stage start-ups and small companies. Both Venture Capital schemes are highly popular among UK investors and approximately 86% of UK Angels utilised the SEIS/EIS schemes during the 2018/19 tax year. While the benefits for investors are compelling (Income Tax Relief, Tax Free Exit and Loss Relief among others), for founders, being SEIS/EIS eligible is almost a must.
With SEIS which is designed to help companies raise money (up to £150,000 in total) when it is starting to trade the basic qualifying criteria are:
to have been trading for less than 2 years and
have under 25 employees.
EIS facilities start-ups raise money (a maximum of £12 million) to help scale their operations and the later stage of the company is reflected in the more generous less than 7-year age/ 250 employees’ requirement. Knowledge Intensive Companies (KIC) enjoy less restrictions.
There is a list of excluded activities not eligible for the schemes: dealing in land, banking, farming, among others as well as a strong risk to capital requirement: there should be genuine commercial risk and a credible chance that the investor will lose capital.
The procedure allows for an Advance Assurance Application: a discretionary opinion from HMRC with no legal force, indicating to your investors that investment in your company is likely to qualify for the tax relief. While the Advance Assurance route is not compulsory it is often insisted upon by most investors and is a great check-up tool to avoid subsequent rejection that is final and cannot be reversed. Following an investment, investors can claim tax relief only after the start-up has completed and sent the relevant forms to the Small Companies Enterprise Centre (SCEC) - once qualification is confirmed by the SCEC, certificates conferring tax relief can be issued to your investors.
The rules governing the SEIS/EIS schemes could be complex and technical for investors and founders alike and your investor could have the tax relief clawed back in case of any breach of the qualifying conditions. Some potential pitfalls include: trading in partnership, multi-tier structure corporate ownership, receipt of royalties, the timing in receiving cash and issuing shares and use of non-equity instruments among others.
We at First Steps are here to assist you with your initial Advance Assurance Application as well as the subsequent steps in providing the necessary certificates for your investors and ensuring the qualifying conditions are observed throughout the investment cycle.
