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EIS & SEIS Schemes

by Feb 7, 2023Uncategorized

Here at Insight FD, we find that raising finance can be one of the most challenging yet fundamental aspects in securing a business’ future.

Equity investment can be a useful route & SEIS and EIS are really effective schemes for entrepreneurs and growing businesses. These schemes make investment in early stage companies much more attractive by incentivising investors through tax breaks. In this blog, we reveal 10 things you need to know about EIS and SEIS tax relief.

What is SEIS Tax Relief?

The Seed Enterprise Investment Scheme (SEIS) was introduced in 2012 with the aim of helping smaller, early stage businesses to raise capital. Recognising the inherently risky nature of buying shares in such businesses, investors are rewarded via tax relief on their investment in a qualifying company. Only individual investors (not companies/funds) are eligible to participate as SEIS investors and they must not be ‘connected’ to the company through employment or other financial interest.

What is EIS Tax Relief?

The Enterprise Investment Scheme (EIS) began in 1992 & it entitles the investor to tax relief at 30% of the amount paid for shares they buy in a qualifying company, effectively reducing their income tax in the year in which the shares are purchased. This is an excellent incentive for purchasing shares in these companies.

SEIS vs EIS – the differences

Although similar, there are some key differences between these two tax relief schemes. Both are based on their eligibility requirements and each has its benefits.

The SEIS is explicitly aimed at startups and early stage companies. The EIS on the other hand can be used by larger early stage companies, although these eligible companies would still be considered small in the wider context of the UK businesses.

The 10 things you need to know:

1. The SEIS provides investors with 50% income tax relief on the cost of the shares purchased. For every £1 invested, HMRC will refund 50p to the investor, (regardless of the investor’s income tax rate). An investor can invest up to £100,000 (rising to £200,000 from April 2023) per year through SEIS.

2. Both schemes (SEIS and EIS) encourage early investment rounds in the UK. Partly as a result of the success of these schemes, the UK has one of the most active markets for angel investment. The UK Business Angels Association states that 90% of angel investors have invested through the EIS or SEIS. The introduction of these schemes has encouraged annual investment of around £1.5bn.

3. Companies attracting SEIS investment must have been trading for less than 2 years (3 years from April 2023) and have less than 25 employees.

4. An investors must be a UK taxpayer to claim SEIS or EIS income tax relief. As above, investors will not be eligible for either SEIS or EIS if they are connected to the company via employment or other financial interest.

5. The rules on the maximum age of the business qualifying for EIS investment relate to the age of the underlying business (i.e. the date that the business started trading), not the age of the business (date of incorporation). The limit for taking part in the schemes is 7 years from the date that the business commenced trading however, in some cases where the company is more than 7 years old, an investment may still qualify, if the company is raising capital to launch a new product or enter new markets. To qualify, HMRC must consider that the new product or market represents a real risk for an investor.

6. UK startups can qualify as a “knowledge intensive companies”. These companies are given a special, even more generous status when it comes to both SEIS and EIS. The lifetime funding limit of EIS is almost double at £20m as opposed to £12m, and the fundraising window is also extended to 10 years instead of 7 years.

A business qualifies as a knowledge intensive company if:

15% of its operating costs are spent on innovation, research or development during at least one of the last three years. Plus, 10% of its operating costs in each of the previous three years leading up to that year.

At least 20% of the company’s employees must hold a higher education qualification and the work they are employed to do must have a direct relation to the subject of that qualification.

7. SEIS and EIS investors pay no Capital Gains Tax on disposal of relevant shares, as long as the company qualifies for SEIS/EIS for 3 years.

8. For companies to be eligible for SEIS, they must have total gross assets valued at no more than £200,000 (rising to £350,000 from April 2023). To fundraise through the EIS, a company must have no more than £15 million in total gross assets.

9. Director (and third party) loans can be repaid under the SEIS but not EIS. As long as the loan was used for trade and is not linked to an investor in any way, investors can agree that loans will be repaid to founders and third parties in the future.

10. SEIS and EIS shares obtained by investors must be ordinary shares with no preferential rights. The shares must be fully paid for in cash and upfront.

Summary

SEIS and EIS were introduced to incentivise & increase investment in small businesses and drive innovation in the UK. By offering a range of benefits, including Income Tax relief and Capital Gains Tax advantages, the schemes balance risk and reward and make fundraising easier for small businesses. Understanding eligibility for both investors and businesses can be tricky, and professional advice should always be sought in uncertain circumstances, such as when exiting a scheme and looking to take advantage of tax relief.

It is always recommended to seek Advance Assurance from HMRC to ensure the company’s eligibility (this will not tell the company whether the investor is eligible for either investment scheme).

We are always happy to answer any queries so get in touch to hear more.

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