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Using EIS and SEIS schemes to make your company more attractive to investors

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

27 Oct 2022

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are longstanding UK government schemes designed to help small, high-risk companies raise finance easier by offering tax relief to investors. If you can demonstrate that your company would qualify for EIS/SEIS relief for investors, then it should make raising equity finance easier.

EIS was first introduced in 1994 with the purpose of encouraging private investment into early-stage businesses through the provision of generous tax reliefs. SEIS was introduced in 2012 following the success of the EIS scheme to help encourage investment into even smaller and younger companies.

Is my company eligible?

Your company may be eligible to raise funding through EIS/SEIS if:

  • You are based in the UK
  • You are not listed on a recognised stock exchange
  • You are not controlled by another company
  • It is within seven years of your first commercial sale
  • For EIS the company must have gross assets less than £15m before the shares are issued (and less than £16m afterwards) and have fewer than 250 employees
  • For SEIS the company must have gross assets less than £200,000 (£350,000 from April 2023) and fewer than 25 employees when the shares are issued

You can raise up to £5m a year through EIS investments and up to £12m over the company’s lifetime. You can receive up to £150,000 in funding through SEIS investments (this is increasing to £250,000 from April 2023).

The money received must be used for a qualifying trade, preparing to carry out a qualifying trade (which starts within two years of the investment) or R&D that’s expected to lead to a qualifying trade. It must be spent within two years of the investment or the start of trade (if later), it must not be used to buy all or part of another business and must pose a risk of loss to the investor.

The investment must meet HMRC’s ‘risk to capital’ condition. This means that your company must use the money for growth and development and the investment must be a risk to the investor’s capital, i.e. there is a risk that the investor will lose more capital than they are likely to gain as a net return.

You can raise funding through SEIS and then EIS but you cannot raise funding through SEIS once you have received an EIS qualifying investment.

What are the benefits for investors?

The main appeal of these scheme is the significant tax reliefs they offer to investors along with the chance to invest in the newest and most exciting businesses. The tax benefits include:

  • Up to 30% income tax relief either against this year’s tax bill or last year’s (50% for SEIS)
  • No capital gains tax payable on disposal as long as you hold the investment for three years
  • Ability to defer capital gains made elsewhere, by investing these in EIS qualifying shares (50% for SEIS)
  • Loss relief – possibility of offsetting losses against income or capital gains tax
  • Inheritance tax free as long as the EIS investment is held for at least two years prior to death

What are the next steps?

You can ask HMRC if they agree that any investment would meet the conditions of the scheme in advance of any investment. This is called Advanced Assurance and you can use this to demonstrate to potential investors that your potential investment would qualify, thus making it more attractive. You will need to send details of:

  • how much you hope to raise
  • business plans and forecasts
  • a copy of the latest accounts, if available
  • details of all trading and activities to be carried out, and how much you expect to spend on each activity
  • a list of the amounts, dates and venture capital schemes under which you’ve previously received an investment (if any)
  • a copy of the memorandum and articles of association of the company and details of any changes you expect to make
  • a copy of the register of members from the date you apply for advance assurance
  • the latest draft of any documents you use to explain your proposal to potential investors
  • details of any other agreements between the company and the shareholders or VCT

HMRC will then review the information sent and, if approved, will send you a statement saying that the investment is likely to qualify.

Once the investment has been made, you’ll need to submit a compliance statement to HMRC and demonstrate that nothing has changed since you applied for the Advanced Assurance (otherwise you will have to re-submit). HMRC will then give you permission to issue certificates to investors so they can obtain their tax relief.

How we can help

At Alliotts we are experienced in dealing with HMRC and can help your company in obtaining Advanced Assurance and then applying for compliance certificates once the investment is made. Please contact us for more information.

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