Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are two tax incentive schemes for UK taxpayers who invest in qualifying start-ups and early-stage companies. These schemes are incredibly important to the growth of UK-based businesses as the significant tax reliefs make these “high risk” investments more appealing to angel investors via reducing this risk through incentives.

The Seed Enterprise Investment Scheme and Enterprise Investment Scheme are two of the most under-rated investment schemes available to start-ups and early-stage companies, as it allows both UK and non-UK companies to raise considerable investment.

Advance assurance is essentially a pre-approval process operated by HMRC prior to any investment into the company or shares issued. Advance assurance involves providing HMRC with your business plan, financial projections, incorporation documents, and demonstrating how the company meets the qualifying conditions. Once a company is granted advance assurance, they can then begin fundraising and let potential investors know they could avail of the SEIS and/or EIS tax reliefs should they invest in your company.

Contents: SEIS & EIS Guide

How do start-ups benefit from SEIS and EIS?

All entrepreneurs should understand the funding landscape available to them that will best fit their business and help it grow. Many entrepreneurs don’t realise the significant equity investment available from UK investors through the SEIS and EIS schemes. This type of funding can benefit entrepreneurs first by making the company more attractive to potential investors but possibly open avenues to over benefits for the company.

  1. SEIS and EIS money must be used to grow and develop the company, this will ensure management uses the investment in the best way, for example, rather than paying back outstanding loans.
  2. SEIS and EIS investment can also promote relationships with more experienced entrepreneurs and investors. Many fund managers and business angels often provide mentoring and assistance to investee companies. As long as business angels don’t become directors of the investee company, before the SEIS/EIS share issuance, they will likely still be able to avail of SEIS and/or EIS tax reliefs.
  3. SEIS and EIS investment is not debt finance, meaning entrepreneurs don’t need to worry about any interest or repayment considerations. If the Company is successful investors will be rewarded through dividends or a profitable exit via a trade sale or IPO.

There are many potential benefits of this type of investment, but ultimately these schemes make investing in SEIS or EIS companies much more attractive to investors.

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How much can you raise under SEIS and EIS?

  1. Businesses can raise £150k on SEIS and then further amounts would be under EIS. This amount
    • includes any other de minimis state aid received in the 3 years up to and including the date of the investment.
    • counts towards any limits for later investments through other venture capital schemes.
  2. Businesses can raise £5M a year up to £12M on EIS. Note there are different rules for knowledge-intensive companies that want to raise over £12M.

Don’t underestimate SEIS investment, the tax reliefs are more attractive than EIS tax reliefs, if your company qualifies for SEIS don’t skip it. If you intend to raise under both SEIS and EIS, ensure that SEIS shares are issued first and that they are issued at least one day before the EIS share issue.

What businesses are eligible for SEIS and EIS?

Most businesses are eligible for SEIS and EIS however there are certain trades that are excluded from the schemes. These excluded trades include the following:

  • dealing in land, in commodities or futures or in shares, securities or other financial instruments;
  • dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;
  • banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
  • leasing;
  • receiving royalties or licence fees;
  • providing legal or accountancy services;
  • property development,
  • farming or market gardening;
  • holding, managing or occupying woodlands, any other forestry activities or timber production;
  • shipbuilding;
  • producing coal;
  • producing steel;
  • operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment;
  • operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home;
  • provision of services or facilities for another business;
  • all energy generating activities.

If you are unsure on whether or not your company is conducting a qualifying trade, be sure to check the HMRC webpage for more details on each of the excluded trades.

Additionally, your company can still qualify if you conduct an excluded trade if it isn’t a substantial part of the business. The excluded trade cannot account for more than 20% of the company’s overall trade. However, in reality, this activity should be significantly less than 20%, as the Company will need to stay below this threshold for three-years following the issue of the SEIS and EIS shares. 

What are the SEIS and EIS Qualifying Conditions?

Seed Enterprise Investment Scheme (SEIS) as the name suggests is for seed investment on the earliest stages of a company. Your company (and subsidiaries) could be eligible for the scheme if it meets all the following qualifying conditions:

  • carries out a qualifying trade;
  • trading less than 2 years – i.e., first commercial sale occurred within the past two or has not yet occurred;
  • is incorporated in the UK or has a UK permanent establishment;
  • is not trading on, or plans to be on, a recognised stock exchange (excluding the Alternative Investment Market (AIM));
  • has no arrangements to become a subsidiary of another company;
  • does not control another company other than qualifying subsidiaries;
  • has not been controlled or been a subsidiary of another company;
  • does have gross assets over £200,000 when the shares are issued;
  • is not a member of a legal partnership;
  • has less than 25 full-time equivalent employees in total when the shares are issued;
  • not received investment through EIS or from a venture capital trust;
  • meet the risk to capital condition 

Enterprise Investment Scheme (EIS) differs by being more focused on established businesses. Your company (and subsidiaries) could be eligible for the scheme if it meets all the following qualifying conditions:

  • carries out a qualifying trade;
  • trading less than 7 years – i.e., first commercial sale occurred within the past seven or has not yet occurred;
  • is incorporated in the UK or has a UK permanent establishment;
  • is not trading on, or plans to be on, a recognised stock exchange (excluding the Alternative Investment Market (AIM));
  • has no arrangements to become a subsidiary of another company;
  • does not control another company other than qualifying subsidiaries;
  • does not have gross assets more than £15 million before the EIS share are issue, and not more than £16 million immediately afterwards;
  • is not a member of a legal partnership;
  • has less than 250 full-time equivalent employees at the time the shares are issued;
  • meet the risk to capital condition

When an application is submitted to HMRC they will confirm whether a company meets the qualifying conditions based on what is submitted to them, and the information available to them online. For instance, HMRC will confirm how many employees your company has via the PAYE scheme. If there is any contradicting information available online, it is recommended to pre-emptively address anything that may concern a qualifying condition otherwise you may face extensive questions.

What is the difference between the SEIS and EIS? 

Employees Trading Gross assets Lifetime Limit
SEIS Less than 25 Less than 2 years Less than £200k £150,000
EIS Less than 250 Less than 7 years Less than £15m £12m

If your company qualifies for SEIS, then it will qualify for EIS. Both SEIS and EIS can be applied for in the same application.

What is the Risk to Capital condition? 

The risk to capital condition was introduced to prevent tax-motivated investments, where investors received considerable tax reliefs with minimal risk. There are two parts to the Risk-to-Capital condition:

  1. Growth and Development – The company must have the objective to grow and develop in the long-term. HMRC will look at three generic indicators in your financial forecasts: revenue increases, cost increases and employee costs increase (increases in employee numbers).
  2. Significant Risk – There must be a considerable risk that investors will lose their investment. You should be realistic in presenting both the risks and opportunities in your business plan, this includes everything from the genuine commercial risk to the competitors and the industry itself.

Things companies should be aware of 

  • The investment received under EIS is not included in the gross assets test performed by HMRC.
  • A company cannot be 50% owned by another company and qualify for SEIS/EIS. Only the Topco or Parent entity in a group structure can make an SEIS and/or EIS application.
  • Non-UK companies, companies incorporated outside the UK seeking SEIS/EIS will need to meet the permanent establishment before applying for advance assurance. A non-UK company must either have a permanent location (i.e., branch, management location, etc) where significant activity occurs, or a UK agent with the authority to act on behalf of the company.
  • A company must stay qualifying for three-years following the share issue of the SEIS and EIS shares.

What can your company use the SEIS and EIS investment for? 

In order to receive SEIS or EIS investment, the funds raised must be used for a qualifying business activity. They must be used to promote the growth and development of the company, such as hiring new employees, developing the product/service, marketing, etc. There are some exclusions regarding what SEIS and EIS investment can be used for, this includes the following:

  • It can’t be used to acquire assets or another company.
  • It can’t be used to repay any current or outstanding loans.
  • It can’t be used to pay cash out to shareholders.
  • It can’t be used to assets that can be resold by the company with little variance from the purchase price.
  • It can’t be used to purchase land or finance the entirety of a land lease.
  • Where 20% or less of a company’s overall trade is excluded, SEIS and EIS investment cannot be employed for this excluded trade.
  • Production companies cannot use the investment to fully finance a film; the investment must be used to grow and develop the company’s internal infrastructure.

The reason behind many of the exclusions above are because all companies seeking SEIS and EIS investment must be risky, and there should be a considerable risk that investors will lose some, if not all, of their investment into the company.

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How to apply for SEIS & EIS Advance Assurance? 

‍‍Most investors will require your company seek advance assurance before making an investment. You should therefore submit an advance assurance application to HMRC before you start your funding round.

You will need to provide the details of potential investors with your advance assurance application, HMRC will not accept a speculative application. HMRC will require the details of at least one proposed investor.

You will also require the following to submit an application:

  • Incorporation documents including certificate of incorporation, memorandum, and articles of association.
  • Unique Tax Reference (UTR).
  • Company details per Companies House.
  • Business plan and financial forecasts.
  • A copy of the latest management or financial accounts (if any).
  • An explanation of how you meet the risk to capital condition.
  • Subscription or shareholder agreement (if any).
  • Details of any venture capital schemes previously received.
  • Advance Assurance application.
  • SEIS checklist and EIS checklist.

Submit the application and documents to: enterprise.centre@hmrc.gov.uk.

HMRC aim to reply to all applications within 45 days, although It will generally take 2-3 weeks for HMRC to approve your advanced assurance, providing your application is correct and HMRC have no questions or queries. If HMRC does have questions this will result in delays. We did however complete ours in less than 4 weeks, as have many members who followed our process. 

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Are there any deadlines to be aware of?

You can apply for SEIS and EIS advance assurance all year round, there are no deadlines to be aware of. Although It’s suggested seeking advance assurance well before the end of the UK tax year. Investors will typically want to have their shares issued and their SEIS3/EIS3 before April each year to minimise their taxes.

Although there is no deadline, you should seek to submit your SEIS1 and EIS1 compliance statements before January, because from January to April HMRC is very busy and can be slow to respond.

SEIS and EIS Pitfalls 

  • An SEIS1 and/or EIS1 compliance statement cannot be submitted until the company has either been trading for four months or 70% of the SEIS and/or EIS monies has been spent.
  • All SEIS and EIS shares must be full-risk ordinary shares. It doesn’t matter what class the shares are; however, there must be no preferential terms. There can be no attempts to reduce the investors’ risk, meaning no liquidation or redeemable rights.
  • SEIS and EIS shares cannot be issued on the same day. SEIS shares must be issued at least one day before EIS shares are issued.
  • SEIS and EIS shares must be paid for in full before any shares can be issued. HMRC will review a company’s bank account and ensure the money was in before the shares were issued.
  • There must be no arrangement in place for share capital preservation or pre-arranged exits for SEIS and EIS investors to get their money back.
  • A company must be a going concern when fundraising. You must be able to meet your debts when they are due, and the company’s liabilities cannot be greater than its assets.

What happens after your round is closed? 

After your funding round is closed, and share certificates have been issued to investors, a SEIS1 and/or EIS1 compliance statement must be sent to HMRC before your investors can be granted their tax relief. If successful, HMRC will provide your investors with a unique investment reference number, which allows companies to issue SEIS3/EIS3 certificates to investors, enabling them to claim their tax relief. 

How to find SEIS and EIS investors? 

By applying and obtaining an advance assurance, you will be able to promote your investment to angel early-stage investors, many of whom exclusively invest in SEIS/EIS eligible businesses. Many of the investors that regularly sit on the panel at Othership’s monthly business pitch event have mentioned investing exclusively in SEIS/EIS eligible businesses. Read more about it in the interviews with Andrew Davidson, Clint Greaves or Lynn Nathan.

Investor Tax Relief

SEIS EIS
30% income tax relief 50% income tax relief
CGT disposal relief CGT disposal relief
CGT mitigation – Potential unlimited and indefinite deferral of an existing CGT bill CGT mitigation – Potential exemption of 50% of an existing CGT bill
Loss relief Loss relief
Inheritance tax relief Inheritance tax relief

Investors can invest up to £100k under SEIS, any additional investment will not be eligible for SEIS. Investors can invest up to £1M a year under EIS, any additional investment will not be covered under the schemes. 

SEIS Tax Relief 

  • Investors can receive 50% income tax relief of the amount invested, this can be applied to the year of investment and previous tax year.
    • The fact the relief is on earning means investors should check how much they can actually claim by seeing how much income tax they are paying.
    • Income tax can be reduced to zero.

Example: If the investor has an income tax of £50,000 and decided to invest £100,000 into a SEIS company in the current tax year, his income tax liability is zero. His SEIS investment would effectively cost him £50,000 for an investment in shares worth £100,000.

The maximum level of investment qualifying for SEIS income tax relief is £100,000 per investor, therefore as a result, up to £50,000 income tax relief can be claimed by an investor. This is subject to the investor having sufficient taxable income to allow full relief.

If the investor’s tax liability for the tax year when the investment was made is less than £50,000, he can carry back the relief to the previous tax year. An investor can carry back 100% of their income tax relief to the previous tax year.

  • Investors can also reduce their CGT on gains made elsewhere by up to 50% of any capital gains that they choose to reinvest in a SEIS investment.

Example: If an investor makes a capital gain of £100,000 from selling a painting, they can invest the capital gain into a SEIS investment. The amount of SEIS reinvestment relief for the reinvested capital gain is 50% of the SEIS investment, £50,000. Provided the SEIS shares are held for three years the relieved gain is wholly exempt. The balance of the remaining gain of £50,000 is chargeable to CGT as normal. The capital gain is deferred or frozen until the SEIS investment is disposed of, i.e., the sale of the SEIS shares

  • If everything went a bit wrong, investors could offset losses, less the income tax relief received.
  • Investors won’t pay capital gains on any increase in the value of shares held over three years, or inheritance tax on shares held for over two years. 

EIS Tax Relief

  • Investors can receive a 30% tax relief of the amount invested, this can be applied to the year of investment and previous tax year.
    • The fact the relief is on earning means investors should check how much they can actually claim by seeing how much income tax they are paying.
    • Income tax can be reduced to zero.

Example: If an investor has an income tax of £30,000 and decided to invest £100,000 into an EIS company in the current tax year, his income tax liability is zero. His EIS investment would effectively cost him £70,000 for an investment in shares worth £100,000.

The maximum level of investment qualifying for EIS income tax relief is £1,000,000 per investor, therefore as a result, up to £300,000 income tax relief can be claimed by an investor. This is subject to the investor having sufficient taxable income to allow full relief.

If the investor’s tax liability for the tax year when the investment was made is less than £300,000, he can carry back the relief to the previous tax year. An investor can carry back 100% of their income tax relief to the previous tax year.

  • Investors can defer a taxable gain by investing in an EIS company. The deferred capital gain will not need to be paid until shares are disposed of.
    • Investors could hypothetically keep reinvesting this capital gain into EIS investments and never have to pay it.

Example: If an investor makes a capital gain of £100,000 from selling a painting, they can invest the capital gain into an EIS investment. Since the investor invested this capital gain into an EIS investment, they are eligible for EIS reinvestment/deferral relief to defer all or part of the capital gain.

The investor must claim a specific amount of reinvestment/deferral relief, this will allow the taxpayer to take advantage of any unused annual exemption or capital losses. The capital gain is deferred or frozen until the EIS investment is disposed of, i.e., the sale of the EIS shares.

  • If everything went a bit wrong, investors could offset losses, equivalent to the tax rate they pay.
  • Investors won’t pay capital gains on any increase in the value of shares held over three years, or inheritance tax on shares held for over two years. 

Loss Relief 

Where EIS and SEIS shares are sold at a loss, to calculate the amount of the allowable capital loss, any Income Tax relief obtained on the subscription reduces the cost for Capital Gains Tax purposes. In Essence, any Income Tax relief acquired by the investor will reduce the capital loss that they may claim.

An investor will receive Income Tax relief of 30% of the amount of the EIS subscription. The tax relief in respect of a SEIS subscription is 50% of the amount subscribed. An investor invests £100,000 into a SEIS and EIS company.  The investors invest £50,000 in SEIS shares and £50,000 in EIS. The tax relief benefits allow them to collect 50% of their investment back against their income tax for SEIS, which reduce their tax liability by £25,000 and 30% of the £50,000 under EIS which will enable them to reduce their tax liability by £15,000. The value of the investment falls to zero. Taking away what the investor has already claimed on tax relief, this shows that they are at a net loss of £60,000 (£100,000 – £25,000 – £15,000).

The investor offsets their loss against their income tax liabilities.  For the tax year, they earned £200,000, which means they are an additional rate taxpayer of 45%. 45% of the £60,000 loss obtained is £27,000.

The investors overall loss of their investment is £33,000 (£60,000 – £27,000) and obtains a loss relief of £27,000 which they can offset against their income tax which may not return the full initial capital outlay of £100,000, but it does ease the burden by £67,000.

If the loss happens within the three-year holding period, would an investor lose their tax relief? If a company is wound up for genuine commercial reasons the tax relief should not be withdrawn. 

Are SEIS and EIS companies a good investment? 

Investing in start-ups and early-stage companies are high risk, it’s important to understand there are significant risks associated with investing in small private companies.

Investors should be aware SEIS and EIS investments are illiquid, generally lack dividends, have a high chance of loss and will likely be diluted over time.

The SEIS and EIS tax relief schemes offer excellent opportunities for both investors and companies. The various incentives such as income tax relief and CGT deferral are the more well-known benefits; however, loss relief is just as advantageous. It reduces an element of risk on a high-risk investment which in turn gives peace of mind to investors.

Who can invest in SEIS and EIS schemes? 

  • Investors must be UK taxpayers;
  • Investors can invest a maximum of £100,000 in SEIS investments per tax year;
  • Investors can invest a maximum of £1,000,000 in EIS investments per tax year, and £2,000,000 for Knowledge Intensive Companies (KIC) EIS investments per tax year;
  • SEIS and EIS shares must be held for a minimum of three years following the share issue or HMRC will claw back any tax reliefs.
  • Investors cannot have a connection to the company, such as being an employee, family member (excluding siblings), paid director, business partner, trustee, spouse, parents, child, grandchild, or grandparent of someone with more than a 30% stake in the business, or have any substantial interest (possess or entitled to acquire more than a 30% stake in the company).
  • SEIS and EIS Investors cannot hold more than 30% of the company’s equity;
  • Investors cannot qualify as a SEIS or EIS investor if they have previously invested in the company;
  • Investors will not be able to claim EIS tax relief if the investment is made as part of a related investment arrangement, linked loan, or tax avoidance scheme.
  • Investors must claim their income tax relief to be eligible for the capital gains tax exemption on the sale of their SEIS/EIS shares.
  • Investors can only claim back tax that they have paid. Therefore, if an investors income tax liability was £20,000 over the current and previous tax years, this is the maximum amount that he could claim back. 

Frequently Asked Questions (FAQs)

What is SEIS and EIS?

The Seed Enterprise Investment Scheme and Enterprise Investment Scheme provides tax incentives to investors in return for investment in a qualifying UK company. The schemes provide entrepreneurs with a route to vital funding in the early stages of their company by reducing the risk to investors.

What’s the difference between SEIS and EIS?

SEIS is aimed at providing investment to start-up companies that tend to be in the development stage of their life cycle, whereas EIS aid slightly more established companies gain investment. The qualifying conditions are different:

Employees Trading Gross assets Lifetime Limit
SEIS Less than 25 Less than 2 years Less than £200k £150,000
EIS Less than 250 Less than 7 years Less than £15m £12m

What are the first steps I need to do before I start putting in my application?

The company must first incorporate and get their unique tax reference (UTR) from HMRC before they can even consider applying for advance assurance.

How much does Advance Assurance cost?

Advance Assurance is a free service offered by HMRC. The only costs to consider are whether you are paying someone to complete the application for you.

I am planning on raising more than £150,000, do I skip SEIS?

Use SEIS to raise the first £150,000 and then use EIS to raise the rest. It is important to remember SEIS offers better incentives to investors and therefore is considered more attractive than EIS.

Do I need advance assurance before getting investment?

Advance assurance is not mandatory, although it is recommended to have, and often is preferred to encourage investment. Investors can invest without advance assurance, however, there is a greater risk that without having advance assurance that the company may not qualify for the scheme.

Can my company issue SEIS share after It’s issued EIS share?

No. SEIS shares must be issued first before EIS shares. Also, SEIS and EIS shares cannot be issued on the same day. 

 


Useful links

Applying for SEIS and EIS investment 

Sapphire Resources 

Learn how to do SEIS & EIS applications without paying a lawyer or accountant.

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This article was written by Bronagh Duggan of Sapphire Capital.

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