The UK government has launched 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 raising equity financing want. So far these schemes appear to have worked well in the critical early years, raising over £23 billion for 40,000 businesses since 1993.
Both systems offer investors generous income tax and capital gains tax relief. The programs reflect the higher perceived risk of investing in start-ups and also mitigate potential downsides for investors. However, it is important for the business owner/founder to remember that the SEIS and EIS programs are only incentives (albeit attractive incentives) and not a direct source of cash income. There are differences between the two systems based on the expectation that companies that have raised seed capital through SEIS will subsequently make further investments under EIS. So how do the EIS and SEIS programs work and how can you use them to get funding for your business?
The SEIS and EIS systems
Both programs aim to attract funding to high-growth UK-based companies that need financial support to expand. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) encourage investors to invest in small businesses by giving them capital gains tax exemption and potentially generous income tax relief. Investors also receive compensation for losses if the small business fails, providing a safety net for their money. However, some key differences in how they work may affect your eligibility for both.
Differences in schemes
SEIS is aimed exclusively at start-ups and young companies with fewer than 25 employees and less than three years of trading history. The EIS system is suitable for larger companies with a maximum of 250 employees and a trading history of up to seven years.
Under SEIS, a company can accept a maximum of £250,000 in total funding from individual investors only and these funds must be spent within three years. Under the EIS, a company can accept total funding of up to £12 million (up to £5 million in each tax year) from private and corporate investors and these funds must be spent within two years.
Eligibility for EIS/SEIS
If you want to receive funding from the EIS and SEIS schemes, you must be a qualifying trade or company based in the UK. HMRC has a checklist of professions that do not qualify for either scheme. These include real estate development, lease-purchase financing, coal/steel production and the management or operation of hotels.
To qualify for SEIS, early-stage start-ups must not be a partnership, not be controlled by another company, not have received EIS funding and have less than three years of trading experience. The number of employees should not exceed 25 full-time employees and the maximum gross assets should not exceed £350,000 when issuing shares.
The EIS qualification criteria for slightly more mature but still young companies are similar. In this case the company must have fewer than 250 full-time employees, have less than seven years of trading history and have a maximum gross assets of £15m when the shares are issued. The Company must not control any other entity (unless it is a qualifying subsidiary), must not have been controlled by another entity since inception, or must not have had more than 50% of its shares controlled by another entity.
A business can raise money by attracting investment under both schemes, but the first round of funding must come from the SEIS scheme (up to £250,000) and move on to EIS for further funding. Although you can apply for both at the same time, EIS investments cannot be made until at least a day after the SEIS investments. In addition, no Shares may be issued under SEIS or EIS unless fully paid up.
Advance insurance for EIS and SEIS systems
When you apply for Advance Assurance (AA) with HMRC, you will receive a certificate stating that any investment is likely to be eligible for EIS/SEIS funding. This certificate can then be made available to potential investors to reassure them in advance that you meet the SEIS/EIS criteria and significantly increase the likelihood of investing in your business. Any application must be made through a company secretary, director or agent to act on your behalf. Bear in mind that receiving the AA certificate from HMRC can take up to eight weeks.
The information you will need to provide includes your business plan and financial projections, current accounts, memorandum and articles of association, and details about how much money you plan to raise and what you plan to spend it on. Documents proving that you qualify for SEIS/EIS schemes should also be included, as well as details of any schemes under which you have previously raised funds and any information or literature you have used to pitch your potential investors Explain company.
Once the SEIS/EIS funding round is complete, you will submit a certificate of compliance to HMRC so that your investors can receive their tax relief. HMRC will issue each of your investors a unique investment reference number which they must use to claim their relief amount.
Long-term growth requirements in both systems
It should be noted that both systems increasingly require a company to demonstrate that the main objective of fundraising is to ensure the long-term growth of a sustainable business (rather than a short-term project). Some companies find it difficult to demonstrate their intended long-term profitability beyond an initial short-term product or idea, especially when marketing and fundraising documents emphasize short-term success. Companies must also demonstrate that they will use the money raised for the long-term growth of the company. To obtain the AA certificate, a comprehensive business plan and forecasts to demonstrate trading intentions beyond the next three years are essential.
Motion Paradox’s team of start-up business and legal advisors based in London and Los Angeles can help you navigate the process of seeking investments through these programs, provide informed feedback on your plans and create tailored documentation , so you can convince HMRC and future investors to support your vision of a sustainable future for your business.
