The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are both tax incentivised schemes to encourage UK tax payers to make investments in small and medium sized trading companies.
Both schemes provide the individual investor with tax relief on any amounts, within the limits below, that they invest into SEIS or EIS approved companies. This means the potential downside risk to the taxpayer is reduced due to the tax relief on the amount invested. Both schemes also exempt from tax any gains made from the ultimate sale of these shares.
The tax incentives are only available to UK tax payers and the investor must have paid enough UK tax in the tax year to be able to offset any income tax relief being claimed. Further the investor cannot own more than 30% of the company in total and must not be an employee or paid director of the business (except in the case of SEIS). However having EIS or SEIS approval does make your investment opportunity more attractive to potential investors in your company.
The EIS offers the investor 30% tax relief on the initial investment they have made, while the SEIS offers 50% tax relief. So under EIS if an individual made an investment of £1,000 then after tax relief the actual net cost of this investment to them would be just £700. Under the SEIS the same £1,000 investment would have a cost of £500 after tax relief.
As well as income tax relief for the investor both schemes also offer the investor the ability to defer capital gains tax on gains that they have made which they then invest into EIS/SEIS qualifying shares.
The SEIS was introduced in 2012 and was aimed at trying to encourage initial seed investment in smaller start up businesses by offering even greater tax breaks to the investor, however a company can only raise a total amount of £150,000 under SEIS whereas they can raise up to £5m each year under the EIS.
Both schemes can be used in combination though and most new companies, after getting approval to operate the schemes, will raise their first £150,000 under SEIS and then up to £5m each year under EIS if they need to.
It’s important to remember though that although these schemes do indeed reduce the risk to the investor of the potential investment, getting your company SEIS/EIS approved will not automatically attract investors to your business. You still need an attractive, “investible” business, with a good business idea and a plan and strategy for making it succeed. Getting SEIS/EIS approval is a great benefit to investors however it will not make people invest in something they don’t believe in.
The process for a company to get approved to issue SEIS/EIS shares is relatively straight forward and requires the company to meet a number of conditions. We would always recommend that a company first gets pre-approval of their qualifying status from HM Revenue & Customs. In order to obtain this pre-approval the company needs to show HM Revenue & Customs that they meet the necessary qualifying conditions. Upon obtaining this pre-approval shares can be issued and assuming that the company continues to meet the conditions and in the case of SEIS spends at least 70% of the funds raised, then after 4 months of trading the company can apply formally for approval and then SEIS/EIS certificates can be raised to tax payers confirming their eligibility for the tax reliefs.
The main conditions that a company must meet in order to obtain pre-approval and ultimately formal approval of SEIS/EIS qualifying status are:
|Overall total investment allowed||£150,000 cumulatively||£5m in any 12 months|
|Max employees before share issue||Under 25 employees||Under 250 employees|
|Max gross assets before share issue||£200,000||£15m|