Our North West Tech Funding Report highlighted the importance of the various tax reliefs available to investors in early-stage SME tech businesses.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide investors with a variety of valuable tax reductions, benefits and protections, and are designed to encourage investment in higher-risk companies.
As an entrepreneur it is vital to understand the tax benefits available to investors, as well as an awareness of how those schemes work in practice. If the business is eligible under EIS and SEIS it will usually benefit from significantly increased investor appetite.
SEIS provides investors with the most valuable tax benefits and is focused on very early-stage businesses. If eligible, individual investors can invest up to £100,000 per tax year and receive 50% income tax relief in return. The company must have no more than 25 employees, less than £200,000 in gross assets, and have been trading for less than two years.
EIS is focussed on medium-sized businesses and allows individual investors to invest up to £1m per tax year and receive 30% income tax relief in return. The company must have no more than 250 employees, less than £15m in gross assets, and have been trading for less than seven years.
It is possible to obtain advance assurance from HM Revenue & Customs (confirming that the company qualifies for SEIS or EIS relief) and in practice it is common for a business to receive SEIS investment in early rounds of fund-raising before progressing to EIS investment in later stages.
Tech entrepreneurs should also be aware that their businesses often qualify as “knowledge intensive”, in which case they benefit from more generous SEIS and EIS conditions.
The eligibility criteria for SEIS and EIS investments are detailed and complicated, and HM Revenue & Customs carefully monitor compliance. From an entrepreneurs’ perspective, the important points to keep in mind are:
- the tax reliefs are very generous and will help the business to attract investors,
- it is possible to get advance assurance from HMRC, which should be factored into the timetable ahead of any fundraising, and
- certain events can “claw back” those tax reliefs after the investment has been made.
For more information about the above please contact a member of the Technology team.
If you haven’t seen our North West Tech Funding report, this is available for download on our dedicated page on the Brabners website. We have also prepared a video around the report’s findings which is available on our video hub.
