SEIS and EIS explained

Anyone raising money for their startup quickly bumps into the SEIS (Seed Enterprise Investment Scheme) and it’s bigger sibling EIS (Enterprise Investment Scheme) which are schemes the UK government created in 2012 to help support developing businesses with a need for capital.

The schemes offer income tax relief to investors in risky, early-stage, businesses. While Covid has laid waste to the past couple of years and caused havoc to many businesses, investment has remained buoyant partly because of the benefits of these schemes to investors.

As long as your business qualifies using SEIS & EIS is a no-brainer, indeed most UK investors will require it, so it’s important to understand how the schemes work and what you need to know to apply. 

What is SEIS?

SEIS is designed to help new companies raise their first £150,000 of equity investment. When an investor puts money into an SEIS based investment round they get an immediate income tax relief of 50% of the amount they have invested. Further, they get an exemption from capital gains on share earnings and even more tax relief if the company fails within 3 year. The income tax relief alone is a pretty good deal for higher-rate taxpayers, which is most angel investors.

The requirements for getting SEIS relief are not onerous. Essentially, be a UK company that is fully-independent, have less than 25 staff, less than 200k of assets, not be listed on the stock market, and not have one of the disqualifying trades (like coal mining, steel production, or exporting electricity) be more than 20% of your activities. I don’t think I’ve ever met a legitimate startup that didn’t qualify.

What is EIS? 

Under EIS a business can raise up to £12m in total and up to £5m in any given year as long they are within 7 years of their first commercial sale. The benefits of EIS are similar to those of SEIS, although not quite so generous towards investors. For individual investors the income tax relief is slightly lower, at 30%, but still potentially a substantial benefit. Funds also benefit from capital gains tax relief on sums invested.

The principles that govern whether you qualify for EIS are very similar to those that govern SEIS, with some additional flexibility since it is anticipated that a growing company is, for example, more likely to have subsidiary companies. The rules around capital gains tax and transfer of losses are more complicated, and beyond the scope of this article, but the main thing you need to understand is that

Investors benefit a great deal from EIS.  

But, this development can’t rely on your investor’s continued support, it must be permanent. 

It should be pretty obvious to you that SEIS and EIS are, assuming you aren’t mining coal or running a hotel, a slam dunk and if you weren’t already planning to, you should definitely go sort it out.  

How Do You Qualify? 

At first glance, they seem pretty similar, right? Both the EIS and SEIS offer individual investors tax relief when they buy new shares in your company. And under both schemes, the money must be spent either on a qualifying trade, preparing for a qualifying trade, or work that will lead to a qualifying trade. Any shares you issue must meet the same requirements, whether you’re using the EIS scheme or the SEIS scheme. So which one is best for your business? 

The answer mostly depends on the size of your company. To receive SEIS tax relief, your company must not be in a partnership, must have fewer than 25 full-time employees when shares are issued, and any gross assets must total below £200,000 when shares are issued. The SEIS tax relief can be used if your UK-established company carries out a new qualifying trade, isn’t trading on any recognised stock exchange, is not set to become a subsidiary or quoted company, and controls no other companies (except qualifying subsidiaries).

Similarly, to qualify for EIS, your company must have a permanent UK-based establishment. It mustn’t be trading on recognised stock exchanges, be controlled or owned by another company, have plans to close after any project completion, nor control any companies aside from qualifying subsidiaries. Company size limitations for EIS tax relief are a little more relaxed than those of the SEIS. For this scheme, your gross assets must be worth less than £15 million before shares are issued, and less than £16 million immediately afterwards. When shares are issued, your company must also have fewer than 250 full-time employees. 

There are also limits on your company’s age when it comes to receiving EIS tax relief. Investment must be received within 7 years of your company’s first commercial sale, or that of any subsidiaries. To receive investment after those first 7 years, you must show that the money is necessary to enter a new market, and that it is over half of your company’s annual turnover for the past 5 years. 

How Has Covid Changed Things? 

Although the number of new startups in the UK has experienced huge growth, reaching 672,890 new registrations in the tax year of 2018/2019, Covid had an inevitable impact for a lot of companies. Both large and small. Progressively through 2020, investment into companies that qualify for the SEIS and EIS schemes has fallen, particularly when compared to the previous year. The impact of the pandemic has also undeniably deepened the equity gap, particularly between northern England and the midlands compared to London. Which is all pretty daunting for anyone in a new startup, or in the early stages of their business. 

However, there is some light at the end of the tunnel. The Government is currently set to review company age restrictions for the EIS in 2025. But, this date is being challenged, for instance by the Enterprise Investment Scheme Association, who are calling for the review to be brought forward and to widen opportunities for other areas to benefit from the EIS’s incentives, such as pension funds. 

And, given the global impact that Covid has had, particularly on the digital world, there’s a growing demand for startups to provide solutions to new problems that have emerged. The time has never been better for investors looking to capitalise on fast-growing, young startups. So, if you’re looking for investment, and wonder if you might qualify for either the SEIS scheme or the EIS scheme get in touch!