Now that you’ve set up your company, you’re currently busy working on your products and services and attracting new customers. To gain further traction, you might be thinking about potential investors who are willing to promote your business. However, at the same time, you’re concerned about the risks in investing in early-stage companies. Don’t worry, various investment incentives will help mitigate these issues. The main investment schemes to be discussed in this article are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
SEIS and EIS are investment schemes which are offered by the UK Government to promote innovation and entrepreneurship. The purpose of the schemes is to help SMEs grow their business quickly and provide investors with tax relief through the investment they make.
Although the schemes aren’t industry-specific, HMRC’s statistics reveal that the schemes are mostly used by the tech industry, accounting for 41% of all SEIS investment and 34% of all EIS investment respectively.
We will take in turn to see how the schemes differ from each other and look at the criteria for each scheme in detail.
Similarities
Both schemes provide several tax reliefs to investors. However, you need to meet the following criteria to be eligible for SEIS or EIS:
For more information on excluded activities , please read here.
Importantly, SEIS and EIS shares must be fully paid when they’re issued to investors. The shares must be ordinary non-redeemable shares, with no preferential rights to assets on a winding up. Once you have issued the shares, you will need to submit a compliance statement (form SEIS1 for SEIS and form EIS1 for EIS) to HMRC for investors to claim tax reliefs.
Differences
It’s important for SMEs to understand that SEIS and EIS are different. SEIS is aimed at seed companies that are in the very early stages of the business, whereas EIS applies to established companies. The table here shows the key differences explained further.
A director/individual can’t hold SEIS/EIS shares if they’re connected to the company (i.e. holding 30% or more shares or voting
Although both EIS and SEIS provide a number of tax advantages to investors, it’s crucial for them to understand the reliefs they can claim. The table below is a comparative overview of reliefs available.
Just because you’re outside the EIS timeframe of 7 to 10 years, that doesn’t mean that you are ineligible to apply. HMRC have provided the exceptions below if your company falls outside the EIS age limit.
Condition A: Follow-on funding
Where your company received its first SEIS/EIS investment before the end of the initial investment period, Condition A allows for investment as a follow-on funding. To qualify under this condition, the company needs to prove that the funding will be used for the same business activity as the first investment and satisfy that the additional follow-on funding was foreseen at the time of the initial investment.
Condition B: Investment to enter a new product or geographic market
Condition B applies to companies that have never had received SEIS/EIS investment in the past. As the name suggests, the funding must be used to enter a new product or geographic market. The aim is to help companies enter a new growth phase, and so the company must satisfy that the amount of relevant investment must be at least 50% of the company’s average annual turnover, averaged over the last five years.
You can apply for both schemes at the same time despite being a little more complicated and time-consuming. If you’re seeking investment using both the SEIS and EIS, you need to issue the shares on different days, by raising the initial investment via SEIS first before moving onto EIS provided all the conditions are met. You can’t raise EIS for the first round and use SEIS for the second round. For example, once your company exceeds the £250,000 SEIS limit, you can raise additional funds of up to £5m or more via EIS.
We understand that it’s really challenging for clients to grasp the rules. If you require further assistance, our team can help.
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