Valuable Business

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What you need to know about SEIS/EIS

David Norris

ex-Partner @ Forward Partners

Private investors into early stage businesses in the UK are able to partially offset their investment as a tax credit under the SEIS and EIS schemes.  This article sets out to explain what these schemes are, why entrepreneurs could find them advantageous and what the process looks like from the entrepreneur's perspective.

Key takeaways:

  • Whether a company is eligible or not is set out in some clear rules;
  • Investors like SEIS and EIS because they receive tax breaks on their investment;
  • As a startup, you can apply to HMRC to have "pre-assurance", this takes 4-6 weeks to receive and investors will look for this before committing to invest - so apply early;
  • There are SEIS and EIS "funds" which give you access to larger aggregate commitments.

This article should not be considered professional advice and only summarises the scheme structure. Please seek expert advice if needed.

What are SEIS and EIS?

EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) are tax efficient investing schemes created by the UK government to encourage direct investment into early stage businesses.

Benefits

The tax benefits to the investor are significant under SEIS / EIS. For this reason, it is a major advantage when raising money (especially from Angels but also some VC firms) to be SEIS/EIS eligible. (Note: An individual can invest up to £100k each year under SEIS and £1m a year under EIS. Investors can't be employed by the start-up or own more than 30% of the company. Plus, they need to hold the shares for at least 3 years). There are a few ways in which tax relief can work.

  1. Income Tax relief against the amount invested.
    • SEIS: 50% of the amount invested
    • EIS: 30% of the amount invested
    • For Angel investors who have tax to pay, this make a huge difference to the risk they are taking investing in your start-up
  2. No capital gains tax on any profits. Say our investor invested £10,000 and sold the shares 5 years later for £20,000, they keep all of the £10,000 profit
  3. If the company fails and the investor loses all of their investment, they can reduce their taxable income by the loss.
  4. Plus there’s no inheritance tax to pay on shares that were under EIS.

All in all it's a sweet deal from HMRC - you basically get a discount on the investment, you don't pay tax on the gains and if it fails you can still offset the loss.

Company eligibility

A company is either eligible for SEIS / EIS or it isn't. There are a number of simple eligibility rules; Shares issued under SEIS and EIS must be ordinary shares (not preferential shares). For both SEIS and EIS the company must

  • not be quoted on a stock exchange
  • not be controlled by another company

For SEIS the company must

  • have fewer than 25 employees
  • have no more than £200,000 in assets
  • not be quoted on a stock exchange
  • not be controlled by another company

The company may only raise their first £150,000 though SEIS For EIS the company must

  • have fewer than 250 employees
  • have no more than £15m in assets

The company must not raise more than £5m per year through EIS and money raised must be used within two years.

Process

Most investors will want some assurance that your company qualifies for SEIS / EIS. You will need to HMRC for SEIS or EIS advanced assurance. Here is the form to do that. It can take 4 to 6 weeks to get pre-assurance, assuming you put together a good application pack and HMRC have no queries or questions. If you are applying for SEIS you might like to apply for EIS as well. That way, if your fundraise goes well and you want to take more than £150k (the SEIS limit) you already have the pre-assurance in place for both SEIS and EIS.

Then, after the round is closed, each investor needs to receive an EIS 3 form for their investment in order that they can claim their tax break. The company needs to apply for the EIS 3 forms on behalf of their investors. To do so, the company needs to fill out an EIS1 form and apply to HMRC. If HMRC is satisfied that the company has met all the requirements they will authorise the company to send a form EIS3 to the investor. The form EIS3 shows the investors name and address, details of the shares issued and (importantly) the date when the three year qualifying period for that share holding ends.

SEIS / EIS Funds

SEIS and EIS are not only relevant for Angel investors.  There are also SEIS/EIS investment funds who act as a vehicle to invest on behalf of private investors using an EIS structure.  Typically the a nominee will hold shares on behalf of the underlying investors. It's a big advantage to receive one large cheque instead of dealing with lots of individuals, both in terms of fundraising effort and ongoing administration. However, one small point to be aware of is that in order to maximise the amount of tax benefit available to the underlying investor, sometimes these funds may charge a fee to the company (which is paid back from the amount invested).  If you receive a term sheet with this type of offer, be sure to calculate the true value of the deal before accepting terms.  

Useful links

David Norris

ex-Partner @ Forward Partners

Scaleup operations expert, ex-COO of HouseTrip, Bookable and IOVOX, previously eCommerce and Website Operations Director at Expedia.

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