SEIS AND EIS: A GUIDE TO ATTRACTING INVESTMENT FOR UK BUSINESSES

WHAT IS SEIS AND EIS?

For UK-based startups and growing companies, the UK government’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer unique benefits that can fuel growth significantly.

More than just financial tools, these schemes serve as powerful catalysts, attracting private investment by offering tax incentives and providing the capital needed to elevate your business. Designed to reduce investment risk, they are especially effective in attracting investors.

WHAT IS SEIS?

The Seed Enterprise Investment Scheme (SEIS) was introduced to help early-stage companies raise investment by offering significant tax breaks to investors. This scheme is designed specifically for businesses in their initial years of trading, aiming to attract private investors who might otherwise be hesitant to invest in new ventures.

SEIS ELIGIBILITY

To qualify for SEIS, your company must:

Carry out a new qualifying trade
Be established in the UK
Not be trading on a recognized stock exchange at the time of the share issue
Have no arrangements to become a quoted company or a subsidiary of one at the time of the share issue
Not control another company unless that company is a qualifying subsidiary
Have not been controlled by another company since the date of your company being incorporated

Additionally, your company and any subsidiaries must:

Not have gross assets exceeding £350,000 when the shares are issued.
Not be members of a partnership.
Have fewer than 25 full-time equivalent employees in total when the shares are issued.
The investment must also not be raised through EIS or Venture Capital Trusts (VCTs) beforehand.

If your company meets these criteria, you can raise up to £250,000 through SEIS, providing essential funding during the early growth stages. If your company’s needs exceed this amount, you may still qualify for additional funding through EIS.

SEIS TAX BENEFITS

SEIS offers several tax benefits to investors, including:

50% income tax relief on investments of up to £100,000 per year
Exemption from Capital Gains Tax (CGT) on any profits from selling SEIS shares after three years
Inheritance Tax relief for shares held for a minimum of two years
Loss relief, allowing investors to offset investment losses against other income

WHAT IS EIS?

Enterprise Investment Scheme (EIS) is aimed at more established businesses seeking to scale their operations. Like SEIS, EIS provides tax incentives to investors but is designed for companies that have passed the early startup phase.

EIS ELIGIBILITY

To qualify for EIS, your company must:

Be based in the UK.
Have been trading for less than seven years (or up to 10 years for knowledge-intensive companies).
Employ fewer than 250 employees (or fewer than 500 for knowledge-intensive companies). Have gross assets of less than £15 million.
Operate in a qualifying trade.
Not control another company (except qualifying subsidiaries).

Through EIS, companies can raise up to £12 million over their lifetime, with a maximum of £5 million annually, providing a vital financing option as businesses grow. This scheme is ideal for startups that have moved beyond the initial stages of development.

EIS TAX BENEFITS

EIS offers several attractive tax reliefs to investors, including:

30% income tax relief on investments of up to £1 million per year (or up to £2 million for investments in knowledge-intensive companies).
Exemption from Capital Gains Tax on profits from EIS shares held for at least three years.
Loss relief, allowing investors to claim against income or capital gains.

ELIGIBILITY COMPARISON

CRITERIA	SEIS	EIS
Trading years	Less than 3 years	Less than 7 years (10 years for KIC)
Full-time employees	Less than 25	Less than 250 (500 for KIC)
Maximum gross asset	£350,000	£15 million
Maximum investment	£250,000 in total	£12 million in total (£20 million for KIC)
Maximum individual investment per tax year	£200,000	£1 million (£2 million for KIC)
Maximum investment per year	-	£5 million (£10 million for KIC)
Fund time limitation	3 years	2 years

F.A.Q

HOW MUCH CAN YOU RAISE UNDER SEIS AND EIS?

SEIS allows your company to raise up to £250,000 in total, and your investors will benefit from 50% tax relief on their investments.

EIS permits your company to raise up to £12 million during its lifetime; if your company is classified as a knowledge-intensive company, you may have higher limits available, allowing you to raise up to £20 million.

WHAT CAN SEIS AND EIS FUNDS BE USED FOR?

The money raised through the new share issue must be spent within three years of the share issue. You must spend the money on one or more of the following:

Research and development especially for innovative projects
Hiring employees to expand the workforce
Business expansion, including new product lines or entering new markets
Marketing and business development to grow revenue and the customer base

However, HMRC excludes certain activities for which these funds can be used:

Buying land or property
Repaying loans
Acquiring shares in another company

CAN I USE SEIS AND EIS TOGETHER?

Yes, you can use SEIS and EIS together, but at different times. Typically, companies start by raising funds through SEIS. Once that limit is reached, they can transition to EIS for additional investment, meaning you cannot go back to SEIS after using EIS.

WHO CAN INVEST IN SEIS AND EIS?

In general, anyone who is a UK taxpayer or a non-UK resident with a UK income tax liability can invest under SEIS and EIS to benefit from the tax reliefs; however, there are some limitations.

Ineligible family members for SEIS/EIS tax relief include spouses, civil partners, parents, grandparents, children, and grandchildren of anyone with a substantial interest (30% or more) in the company or any employee of the company. Eligible family members include siblings, aunts, uncles, nieces, nephews, cousins, and friends. However, family and friends can invest under SEIS or EIS only if their total ownership does not exceed 30% of the company’s shares or voting rights.

Directors can invest in their own companies and benefit from SEIS or EIS tax relief, provided they meet specific conditions. One such condition is that investors must not hold a ‘substantial interest’ (more than 30% ownership) in the company.

For SEIS, only directors —not employees—are eligible. A director is defined as someone who manages the company and owns at least 20% of its shares.

Under EIS, unpaid directors can qualify, while paid directors must meet the ‘Business Angel’ rule. This rule stipulates that they must invest first, receive shares, and only then be appointed as a director with remuneration. If a director is already being paid when the shares are issued, they cannot receive a salary but may still receive other forms of nonremuneration income, such as dividends, reimbursement of expenses, or payments for goods and services.

THE SEIS AND EIS PROCESSES

SEIS PROCESS

Applying for Advance Assurance (Optional): Companies can apply for advance assurance from HMRC to confirm their eligibility before raising funds. This reassures investors and typically takes 4-6 weeks.
Issuing Shares: After securing the investment, the company issues shares to its investors.
Submitting SEIS1 Form: Once at least 70% of the SEIS funds have been spent, the company submits the SEIS1 form to HMRC for approval.
Receiving Compliance Certificate and Claiming Tax Relief: HMRC issues SEIS3 certificates to investors, enabling them to claim tax relief.

EIS PROCESS

Applying for Advance Assurance (Optional): Companies can apply for advance assurance from HMRC to confirm EIS eligibility, which can attract potential investors by reducing their risk.
Issuing Shares: Once the company has secured investment, it issues shares under the EIS scheme.
Submitting EIS1 Form: The company completes and submits the EIS1 form to HMRC, confirming that all EIS conditions have been met.
HMRC Review and Approval: HMRC reviews the EIS1 form to ensure compliance with the EIS rules.
Receiving Compliance Certificate: Upon approval, HMRC issues EIS2 and EIS3 compliance certificates, which the company provides to investors.
Claiming Tax Relief: When filing their self-assessment tax return, investors use the EIS3 certificate to claim tax relief.

KEY ASPECTS OF SEIS AND EIS PROCESSES

ADVANCE ASSURANCE

This document is not obligatory; however, it is widely used in practice. Consider it a safety measure, showing investors that they can benefit from tax relief when they fund your company. Essentially, this document serves as a pre-acceptance confirmation for investors.

So, how do you obtain this document?

The process involves an online application, which requires you to provide the documents listed below. This process takes around 4 to 6 weeks. We highly advise against skipping this step unless you have an agreement with an investor already in place.

Another benefit is that if you have already raised some funds but still have some left to raise, obtaining advance assurance can ease the process of finding additional investors.

To apply for advance assurance, you must provide the following documents:

The total amount you intend to raise
Your business plan and financial projections
A copy of your most recent accounts, if available
Information about the companies that will use the investments
Details of all business activities and estimated spending for each
The latest copy of the memorandum and articles of association, along with any planned changes
A member register as of the date of the advance assurance application
The most recent draft of any documents you use to present your proposal to potential investors
Details of any agreements between the company and shareholders or Venture Capital Trusts
A signed letter from a director or trustee if an agent is acting on your behalf
Any additional documents showing that your company qualifies for the scheme.

If you are new to venture capital schemes, you will also need to provide details of your potential investors.

ISSUING SHARES

After HMRC approves your company’s advance assurance, or even if you did not apply, you can issue SEIS or EIS shares, provided that your investors have fully paid for them before the issuance. Timing is crucial, as businesses can often make mistakes regarding this. To qualify, the shares must:

Be ordinary and non-redeemable.
Have no preferential rights to assets in the event of a winding-up and

The maximum amount you can raise through SEIS is £250,000, but, as mentioned before, you can seek further funding later via EIS.

REPORTING SHARE ISSUANCE

After issuing SEIS shares, you must notify Companies House of the new shares. If applicable, you should also file a People with Significant Control (PSC) report.

COMPLIANCE STATEMENT

After issuing shares and securing advance assurance, the next step is to prepare and submit an SEIS Compliance Statement (Form SEIS1) to HMRC.

This form confirms that you have met all the necessary conditions for SEIS funding and provides important information about the shares issued and the investors involved.

WHAT TO DO NEXT?

If SEIS or EIS sounds like what you need to fuel your business or invest wisely, this guide is here to help you get started. Just remember, while these schemes offer excellent benefits, it is crucial to follow the rules carefully. Overlooking the fine print could lead to delays or missed opportunities.

So, take your time, double-check everything, and ensure you’re ticking all the boxes. And, of course, if you would like some extra help along the way, we are always here to guide you through the process. Whether it is navigating the paperwork or answering questions, feel free to reach out at info@sanap.co, and we will be happy to assist.