For startups and small to medium-sized enterprises (SMEs) in the UK, the funding landscape presents both opportunities and challenges. Navigating this landscape requires a strategic approach, particularly when leveraging government incentives designed to stimulate private investment. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) stand out as two such incentives, offering tax reliefs to investors and, by extension, providing a compelling case for investment in emerging businesses. We often use and recommend SeedLegals to early-stage businesses, as a useful starter platform dedicated to legal agreements and fundraising for startups and SMEs. This article aims to provide a comprehensive understanding of SEIS and EIS, their benefits, eligibility criteria, and how you can prepare for and manage these investments.
For information on the UK government's Research and Development (R&D) tax relief scheme click here.
How much can you raise under SEIS & EIS?
Under SEIS, a company can raise up to £150,000 in total. This amount represents the aggregate limit that can be raised under the scheme throughout the company's lifetime, not just in a single year. It's designed to help very early-stage companies get off the ground with seed capital. Once this threshold is reached, a company cannot seek additional funding under SEIS but can look into other funding sources, including EIS.
For EIS, the investment limits are significantly higher, reflecting the scheme's intention to support companies as they scale and require larger funding rounds. In a single year, a company can raise up to £5 million through EIS. Additionally, there's a lifetime limit of £12 million that a company can raise through EIS. For knowledge-intensive companies, recognised for their research and development intensity and innovation, this lifetime limit is increased to £20 million. There is a maximum time limit of seven years from your company’s first commercial sale for EIS; for knowledge intensive companies this can be extended up to 10 years.
What is the SEIS Criteria?
SEIS is specifically designed to help early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies. It's an enticing prospect for both investors looking to mitigate risk and startups in need of capital to kickstart their operations. The scheme is very generous, offering:
- 50% income tax relief on investments up to £200,000 per tax year, which can be carried back against income tax liabilities in the previous tax year.
- CGT exemption for any gains on the SEIS shares if held for at least three years.
- Loss relief, allowing investors to offset any losses against their income tax, further reducing the risk of their investment.
- 50% of capital gains are exempt from CGT if it is re-invested in a SEIS-qualifying company.
For startups, the appeal of SEIS is clear. However, eligibility requires meeting specific criteria: the business must have been trading for less than two years, have fewer than 25 employees, and possess no more than £200,000 in gross assets. Additionally, the company must not have received investment from another venture capital scheme prior to the SEIS investment.
“De minimus” State Aid (relevant for SEIS)
In the context of SEIS, it's important to understand how the concept of “de minimus” state aid plays a crucial role. “De minimus” state aid refers to the small amounts of state aid that can be given to a single recipient without needing prior approval. A new UK subsidy control regime kicked in on 4 January 2023; adopting a principles-based and self-assessment focused approach to compliance.
Under SEIS, the investments made are considered de minimis state aid. The threshold is set at £315,000 over three financial years.
For startups planning to utilise SEIS, it's critical to track all forms of de minimis aid received to ensure compliance with these rules (crucial for deep tech startups). This includes not only SEIS funding, but any other government grants or subsidies that also qualify as de minimis aid. Exceeding the £315,000 threshold could lead to complications with SEIS eligibility and the receipt of other forms of government assistance in the future.
What is the EIS Criteria?
Building on the foundation laid by SEIS, EIS is designed for more mature startups and SMEs seeking larger investments. While the tax reliefs are less than those offered by SEIS, they still present a significant incentive for investors:
- 30% income tax relief on investments up to £1 million per fiscal year, which increases to £2 million for investments in knowledge-intensive companies.
- CGT exemption on gains from the sale of shares after a minimum holding period of three years, similar to SEIS.
- Inheritance tax relief, making EIS investments exempt from inheritance tax after two years.
- CGT deferral relief, allowing investors to defer capital gains from other investments by reinvesting those gains into EIS-eligible shares.
EIS eligibility criteria are broader than those of SEIS, catering to companies with up to 250 employees and £15 million in gross assets before the investment. The company must have made their first commercial sale less than seven years (or 10 years for knowledge-intensive companies) to qualify.
The Application Process
Understanding and navigating the application process for the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is essential to ensure compliance and maximise the chances of approval. Here's a step-by-step guide to the application process for both SEIS and EIS:
Determine Eligibility
The first step in applying for SEIS or EIS is to assess whether your business meets the specific criteria set out for each scheme. As outlined above, for SEIS, this includes being a young company (trading for less than two years), having assets of less than £200,000, and not having received any EIS or Venture Capital Trust (VCT) funds prior. EIS eligibility includes having assets of less than £15 million before the investment and not being listed on a recognised stock exchange at the time of the share issue.
Prepare the Necessary Documentation
To apply for SEIS or EIS, you'll need to compile several key documents. This includes a comprehensive business plan, financial forecasts, and details about the investment offer. You'll also need to complete form SEIS1 or EIS1, depending on which scheme you're applying for. These forms require detailed information about your company, the investment, and confirmation that you meet the scheme's conditions.
Submit the Application to HMRC for advanced assurance
Once you have prepared all the necessary documentation, submit your application to HM Revenue and Customs (HMRC). This includes the completed SEIS1 or EIS1 form along with any supporting documents. HMRC will review your application to ensure it meets all the requirements of the SEIS or EIS scheme. We would always recommend getting Advanced Assurance from HMRC prior to opening your fundraising round.
Receive Compliance Certificate
If your application is successful, HMRC will issue a compliance certificate for your company. You can then issue individual compliant SEIS / EIS share certificates for your investors. These certificates are crucial as they allow your investors to claim the SEIS or EIS tax reliefs on their investments on their self-assessment returns.
Manage Post-Investment Requirements
After receiving SEIS or EIS approval and securing investment, it's important to adhere to ongoing compliance requirements. This includes using the investment funds for the specified qualifying business activities and reporting any significant changes to your company's situation to HMRC.
Inform Investors
Once you've received the compliance certificates, inform your investors. They can then claim the SEIS or EIS tax reliefs associated with their investment. It's important to provide them with the necessary certificates and any additional information they may need to complete their tax returns.
Navigating the SEIS and EIS application process requires careful attention to detail and a thorough understanding of the requirements. While it's possible to manage this process independently, many startups and SMEs choose to seek advice from legal and financial experts to ensure accuracy and compliance. Successfully applying for SEIS and EIS can significantly enhance your company's ability to attract investment by offering substantial tax advantages to potential investors.
Preparing for SEIS and EIS: Best Practices
For startups aiming to utilise SEIS and EIS, preparation is key. Beyond meeting the eligibility criteria, companies should consider the following best practices:
Business Plan and Financial Projections
Investors will seek a clear understanding of your business model, growth strategy, and financial forecasts. A robust business plan and realistic financial projections are essential.
Compliance and Record-Keeping
Ensure that your company's records, including financials, are up-to-date and accurately reflect the business's operations. This is crucial for both the SEIS/EIS application process and investor due diligence.
Legal and Tax Advice
While platforms like SeedLegals offer significant support, consulting with legal and tax professionals can provide additional assurance that your company is fully compliant with SEIS and EIS regulations. We can recommend Philip Hare & Associates as one of the UK’s leading specialist tax consultancies in UK Venture Capital Tax Reliefs.
Investor Communications
Be prepared to communicate the benefits of SEIS and EIS to potential investors, emphasising the tax reliefs and the reduced risk profile of their investment in your company.
Conclusion
SEIS and EIS offer significant incentives to attract investment. By reducing the risk for investors these schemes can be a cornerstone of your funding strategy. Platforms like SeedLegals not only simplify the application and management process but also provide the guidance necessary to navigate these complex schemes effectively. However, note that platforms like SeedLegals are one-stop-shop platforms. Whilst they are very good for most early-stage startups, for more nuanced needs we’d always suggest using a specialist tax consultant such as Philip Hare & Associates.
As you consider your next steps in fundraising, take the time to understand the nuances of SEIS and EIS, assess your eligibility, and prepare your business to meet the requirements of these schemes. With the right preparation and support, SEIS and EIS can unlock new growth opportunities for your startup or SME, positioning you for long-term success.
