The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are two of the UK government’s most generous - and hence most popular - initiatives to encourage investors to fund early stage businesses. Considering that - in theory at least - newer companies present a higher investment risk, many a founder have applied for one or both of these schemes, hoping to attract investors.
‘Do they work?’, you might ask. Well, with 80% of all angel investments being through an SEIS or EIS investment - amounting to £189m for SEIS and about £2bn for EIS in 2018 alone - you may very well say so.
So if you’re an early stage business founder, the more fitting question seems to be ‘how do I decide which one to go for?’. The quick answer is that SEIS is addressed to slightly smaller businesses than EIS. They are both very similar, but nevertheless present some significant differences in terms of the advantages they offer, and who qualifies for them.
What Are the Benefits of EIS and SEIS?
Both schemes incentivise investors to invest in early stage companies, by offering them significant tax advantages.
Specifically, investors receive a 30% tax relief on their investment through EIS, and 50% under SEIS.
Also, both EIS and SEIS relieve investors of capital gains tax on any profit they made from selling their shares after three years. Investors are also not subjected to inheritance taxes for shares which they’ve held onto for at least two years.
Under both schemes, if the shares are ultimately sold at a loss, investors will be allowed to offset that loss against their capital gains tax.
Am I Eligible for SEIS or EIS?
In order to qualify for either of the two schemes, your company and any potential subsidiaries must meet the following criteria set by HMRC at the time of issuing your shares:
- Have a permanent establishment in the UK (office, factory, branch etc.).
- Not be listed/intend to list on a stock exchange.
- Be involved in a qualifying trade.
- Not control any other companies (excluding qualifying subsidiaries).
- Be independent (i.e. not controlled by another company, or have more than 50% of your shares owned by another business).
- Have made your first commercial sale less than 7 years ago (12 years for Knowledge Intensive Companies).
- Not expect to close after the completion of a project or series of projects.
- Intend to use your SEIS/EIS funds to continue trade, start a new type of trade, or proceed with relevant research and development. You must not use raised funds to acquire another business or trade.
- Plan to utilise the received funds within two years from the time you issue the shares.
Importantly, eligibility criteria differ between the two schemes, when it comes to the size and assets of your company:
- With EIS, you may have up to £15m in gross assets prior to the investment, however SEIS only allows £200,000 or less.
- You can be eligible for EIS if you have up to 250 employees, only up to 25 for SEIS.
How Much Can My Investors Invest Under SEIS and EIS?
Because of the significant tax relief granted to investors under both schemes, the amount that every individual investor can invest is capped. This also helps early stage companies from giving away too much power to a single person too early in their development.
More specifically:
- EIS: each investor can invest up to £100,000 per tax year
- SEIS: each investor can invest up to £1m per tax year
How Much Can I Raise Under SEIS and EIS?
Considering the difference in size companies raising funds under each scheme, the amount they are allowed to raise differs too.
- EIS: An eligible company may raise up to £12m.
- SEIS: An eligible company may raise up to £150,000.
Note that it is possible to raise money under both schemes during the same funding round. However, if you choose to do that, it’s essential that you issue your SEIS shares before the EIS ones.
How Do I Apply for SEIS and EIS?
1. Apply For Advance Assurance
For both SEIS and EIS, you may apply for an Advance Assurance. This is an optional application, which most applicants nevertheless choose to submit because - should it be approved - it offers your business a preliminary confirmation that it might be eligible for SEIS/EIS. Although this is not formal guarantee from HMRC that you are eligible, it indicates that you are very likely to be, which is typically very encouraging for your investors.
2. Submit A Compliance Statement To HMRC
Following that, you must file a Compliance Statement (aka SEIS1 or EIS1, respectively), whereby you provide HMRC with extensive information about your business, so that they can determine whether you are in fact eligible.
3. Receive Authorisation From HMRC
Once your Compliance Statement is approved, you will receive confirmation from HMRC, in the form of an SEIS2 or EIS2 document. This will contain a unique reference number, which you will us to issue Compliance Certificates for your investors.
4. Send Compliance Certificates To Investors
A Compliance Certificate (SEIS3/EIS3) is the actual document that investors can submit to tax authorities in order to claim their tax benefits. It must contain the unique code given to you from HMRC, and be signed by both a company representative and the investor him/herself. You must issue a separate Compliance Certificate for each of your individual investors.
*Important: The above information may vary if your business qualifies as a Knowledge Intensive Company (KIC). To find out more on KICs as well as further details on the EIS/SEIS process and rules, check out our Beginner’s Guide To EIS.
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