EIS/SEIS – UK Investment Tax Incentives

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Definition: EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are tax efficient investing schemes created by the UK government to encourage direct investment into early stage businesses.

Private investors into early stage businesses in the UK can partially offset their investment as a tax credit under the SEIS and EIS schemes. This article sets out to explain what these schemes are, why entrepreneurs could find them advantageous and what the process looks like from the entrepreneur’s perspective.

Benefits

The tax benefits to the investor are significant under SEIS/EIS. For this reason, it is a major advantage when raising money (especially from Angels but also some VC firms) to be SEIS/EIS eligible. (Note: An individual can invest up to £100k each year under SEIS and £1m a year under EIS. Investors can’t be employed by the start-up or own more than 30% of the company. Plus, they need to hold the shares for at least 3 years). There are a few ways in which tax relief can work.

  1. Income Tax relief against the amount invested.
    • SEIS: 50% of the amount invested
    • EIS: 30% of the amount invested
    • For Angel investors who have tax to pay, this make a huge difference to the risk they are taking by investing in your start-up
  2. No capital gains tax on any profits. Say our investor invested £10,000 and sold the shares 5 years later for £20,000, they keep the £10,000 profit.
  3. If the company fails and the investor loses their investment, they can reduce their taxable income by the loss.
  4. Plus, there’s no inheritance tax to pay on shares that were under EIS.

All in all, it’s a sweet deal from HMRC – you basically get a discount on the investment, you don’t pay tax on the gains and if it fails, you can still offset some of the loss.

Company eligibility

A company is either eligible for SEIS / EIS or it isn’t. There are a few simple eligibility rules; shares issued under SEIS and EIS must be ordinary shares (not preferential). For both SEIS and EIS the company must:

  • not be quoted on a stock exchange
  • not be controlled by another company

For SEIS the company must:

  • have fewer than 25 employees
  • have no more than £200,000 in assets
  • not be quoted on a stock exchange
  • not be controlled by another company

The company may only raise their first £150,000 though SEIS.

For EIS the company must

  • have fewer than 250 employees
  • have no more than £15m in assets

The company must not raise more than £5m per year through EIS and money raised must be used within two years.

Process

Most investors will want some assurance that your company qualifies for SEIS / EIS. You will need to apply to HMRC for SEIS or EIS advanced assuranceHere is the form to do that. It can take 4 to 8 weeks to get pre-assurance, assuming you put together a good application pack and HMRC have no queries or questions. If you are applying for SEIS you might like to apply for EIS as well. That way, if your fundraise goes well and you want to take more than £150k (the SEIS limit) you already have the pre-assurance in place for both SEIS and EIS.

Then, after the round is closed, each investor needs to receive an EIS 3 form for their investment to claim their tax break. The company needs to apply for the EIS 3 forms on behalf of their investors. To do so, the company needs to fill out an EIS1 form and apply to HMRC. If HMRC is satisfied that the company has met all the requirements, they will authorise the company to send an EIS3 form to the investor. The form EIS3 shows the investor’s name and address, details of the shares issued and (importantly) the date when the three-year qualifying period for that share-holding ends.

Useful links

 At Shadow Foundr, many of our raises are SEIS/EIS eligible. We have seen some cases when gaining the eligibility has been challenging, so we suggest you contact a specialist in the field before applying.

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