Continuing our series of blogs exploring various sources of public and semi-public funding and other ways to inject capital into your business, I am today looking at raising funding under the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
Source of funding and summary of the program
EIS and SEIS are tax relief schemes introduced by the Government to encourage individuals to invest in small, higher-risk trading companies. The reliefs are available for investors investing into ordinary shares in unlisted companies
SEIS is targeted at start-up ventures. The scheme provides investors with an income tax relief equal to 50% of the funds invested. Investors can invest up to £100,000 under SEIS in a tax year.
EIS is targeted at early stage businesses. The scheme provides investors with an income tax relief equal to 30% of the funds invested. Investors can invest up to £1,000,000 under EIS in a tax year.
Where an investor chooses to claim the relief, they will be exempt from capital gains tax on any gain arising on the sale of the shares. Loss relief is also available against an investor’s income or capital gains taxes if the shares are disposed of at a loss or the investee company fails.
These reliefs can be lucrative and very attractive for investors and help to significantly reduce the risks otherwise involved in investing in early stage business. Many early stage investors will now exclusively invest in companies that qualify for either EIS or SEIS. Qualifying for these reliefs can therefore significantly improve a business’ chances of raising funding.
Eligibility
To qualify for SEIS, a company must:
- have fewer than 25 employees when the investment is made
- have no more than £200,000 in gross assets immediately before investment
- be independent (i.e. not a subsidiary of another company)
- not have previously raised investment under EIS or Venture Capital Trust schemes
A company cannot raise more than £150,000 in qualifying SEIS investment in any three year period.
To qualify for EIS, a company must:
- have less than 250 employees when the investment is made. (500 employees if a knowledge intensive company)
- have no more than £15 million gross assets before and £16 million gross assets immediately after investment
- be independent (i.e. not a subsidiary of another company)
- have been trading for less than 7 years (10 years if a knowledge intensive company), although certain exemptions to this requirement are available
A company can raise no more than £5,000,000 (or £10,000,000 in the case of knowledge intensive companies) in EIS and other relevant investments in any year. Other relevant investments for this test include SEIS investments, Venture Capital Trust investments and other schemes that qualify as ‘state aid’.
Under both SEIS and EIS, shares subscribed for by the investor must be non-redeemable ordinary shares that do not carry preferential rights to the company's assets on a winding up. Relief is only available under the scheme if a ‘risk to capital test’ is satisfied, requiring (a) that the company have objectives to grow and develop over the long term and (b) that the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).
A company will not qualify for either SEIS or EIS investment if it is financially distressed at the time of the investment.
Any restrictions or limitations on access to or use of the funding secured
Money raised under SEIS or EIS must be used in a qualifying trade, or to prepare for a qualifying trade. This requirement excludes (among others) businesses dealing in in land, shares or commodities, property development activities, farming, financial activities and the operation or management of hotels or nursing homes. Companies must also not use SEIS or EIS monies to pay cash out to shareholders or to acquire other businesses or trades.
Both SEIS and EIS investments carry a three year ‘lock in’ period for investors. If an investor disposes of their shares or the investee company breaches certain of the qualifying conditions for the relief in this lock-in period, than the relief will be disallowed. This will require the investor to repay any income tax relief claimed and will result in them losing any future capital gains tax relief
What is the process for applying for the funding?
SEIS and EIS are ‘tax wrappers’ to equity investment, as such there is no single source for raising funds under these schemes.
The reliefs are naturally attractive to angel investors and angel syndicates. The reliefs are also widely applied for in crowd funding raises, with most major platforms identifying which pitches qualify for SEIS/EIS and assisting to complete the filing requirements for investors to claim the reliefs. There are also a growing number of institutional EIS funds managed by professional venture capitalists.
HMRC runs an advanced assurance scheme for SEIS and EIS investments, providing assurance ahead of the closure of a funding round that the investments are likely to qualify for relief. Obtaining advanced assurance can be a key requirement for many SEIS and EIS investors.
If you are looking to secure funding for your business, please contact me directly or another member of our Tech Funding Team.
