The UK government established the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) to provide tax incentives for investors in start-ups, scale-ups and SMEs as well as higher-risk companies seeking to raise equity finance. So far, these schemes seem to have worked well during the critical early years, raising over £23 billion for forty thousand businesses since 1993.
Both schemes offer investors generous levels of income tax and capital gains tax relief. Reflecting the higher perceived risk of investing in start-ups, the schemes also mitigate any potential downside for investors. But for the business owner/founder it is essential to bear in mind that the SEIS and EIS schemes are only incentives (albeit attractive incentives) and not a source of direct cash income. There are differences between the two regimes, based upon the expectation that companies which have raised seed funding through SEIS will then go on and raise further investment under EIS. So how do the EIS and SEIS schemes work and how can you use them to get funding for your business?
The SEIS and EIS Schemes
Both schemes are designed to attract funding to high-growth UK-based businesses that need financial support as they scale up. The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) encourage investors to invest in small businesses by giving them a capital gains tax exemption as well as potentially generous income tax reductions. Investors are also given a relief loss if the small business fails, thus offering a safety net for their money. However, several key differences in how they work could affect your eligibility for either.
Differences in the Schemes
SEIS exclusively targets start-ups and early-stage businesses with less than 25 employees and less than three years of trading history. The EIS scheme is suitable for larger businesses with a maximum of 250 employees and up to seven years of trading history.
Under SEIS, a business can accept a maximum of £250,000 in total funding from individual investors only and these funds have to be spent within three years. Under EIS, a business can accept up to £12 million in total funding (up to £5 million in any tax year) from both individual and corporate investors and these funds must be spent within two years.
Eligibility for EIS/SEIS
If you want to attract funding from EIS and SEIS schemes, you must be a qualifying trade or business established in the UK. HMRC has a checklist of trades that are not eligible for either scheme which includes property development, hire-purchase financing, coal/steel production, and managing or operating hotels.
To qualify for SEIS early-stage start-ups must not be a partnership, not be controlled by another company, cannot have received EIS funding and have less than three years trading history. Headcount must not exceed twenty-five full time employees and maximum gross assets should not exceed £350,000 when shares are issued.
EIS qualifying criteria for slightly more mature, but still early-stage companies, are similar. In this case the business must have fewer than 250 full-time employees, less than seven years of trading history and maximum gross assets of £15 million when shares are issued. The business must not be controlling another company (unless it is a qualifying subsidiary), cannot be controlled by another company since incorporation, or does not have more than 50% of its shares controlled by another company.
A business can raise money by attracting investment under both schemes, but the initial fundraising round must come from the SEIS scheme (up to £250,000) moving on to EIS for more. While you can apply for both simultaneously, EIS investments can only be raised at least one day after any SEIS investments. In addition, no shares under SEIS or EIS can be issued unless fully paid up.
Advance Assurance for EIS and SEIS Schemes
Applying for an Advance Assurance (AA) from HMRC will deliver a certificate stating that any investment will likely qualify for EIS/SEIS funding. This certificate can then be shared with potential investors to assure them that you meet the SEIS/EIS criteria upfront and dramatically improve the likelihood of investment in your business. Any application must be filed via a company secretary, director or agent appointed to act on your behalf. Bear in mind that obtaining the AA certificate from HMRC can take up to eight weeks.
The information you will need to supply includes your business plan and financial forecasts, latest accounts, memorandum and articles of association as well as details of how much funding you hope to raise and what you plan to spend it on. Documents to certify that you qualify for SEIS/EIS schemes as well as details of any schemes under which you have previously raised funding and any information or literature that you have been using to explain your business to potential investors should also be attached.
Once the SEIS/EIS funding round is complete, you share a compliance certificate with HMRC so your investors can get their tax relief, HMRC will issue a unique investment reference number to each of your investors, which they must use to claim their relief amount.
Long-Term Growth Requirements in Both Schemes
It should be noted that both schemes increasingly require a company to provide evidence that the main objective of fundraising is to ensure long-term growth of a sustainable business (not a short-term project). Some companies have struggled to demonstrate their intended long-term viability beyond an initial short-term product or idea, especially if marketing and fundraising documents focus on short-term success. Companies must also demonstrate that they will use any money raised for the business’s long-term growth. A comprehensive business plan and projections to evidence intentions to trade beyond three years is essential in order to obtain the AA certificate.
The Motion Paradox team of start-up business and legal consultants, based in London and Los Angeles, can help you navigate the process of seeking investment through these schemes, providing informed feedback on your plans, and preparing bespoke documentation so you can convince HMRC and future investors to back your vision of a sustainable future for your business.
