The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are both designed to help new and growing young businesses secure much-needed investment.
EIS was introduced in 1994 and SEIS debuted in 2012 – their aim is to help attract investors to start-ups that may have otherwise have been viewed, rightly or wrongly, as too risky.
SEIS is for companies that have been trading for under two years, whereas EIS helps early-stage companies raise funds to help grow the business.
Businesses raising money under SEIS can receive a maximum of £150,000 through the scheme, offering private investors 50% up front tax relief against their income tax bill.
The businesses must have assets of no more than £200,000 and have fewer than 25 employees.
The company must be based in the UK. HMRC says proof of a company’s permanent establishment in the UK includes having an office of factory or one of the following:
- a place of management
- a branch
- a workshop
- a quarry, mine, oil or gas well,
- a building site, such as a construction or installation project.
This is not an exhaustive list, but the type of business a company carries out will be the deciding factor in what premises and facilities are required to meet the conditions for investment.
EIS is for those seeking funding of up to £5m and gives investors 30% upfront tax relief and must have less than £15m of assets and up to 250 employees and therefore is open to far more companies than SEIS.
The same qualifying factors on UK residency apply. Companies cannot raise more than £5m each year and more than £12m in their lifetime, from the four venture capital schemes that currently exist. Individuals cannot invest more than £1m each year.
Any gains from SEIS and EIS investment are 100% exempt from inheritance tax, capital gains tax and income tax.
Will your business qualify?
Most trades qualify but there are exceptions; coal or steel production, farming or market gardening, leasing activities, legal or financial services, property development, running a hotel or nursing home, and electricity, heat, gas or fuel generation.
Apart from being established in the UK, they must not be trading on a recognised stock exchange at the time of the share issue and they must not have any arrangements in place to become quoted.
For start-ups, SEIS is an attractive way to target much needed funding. Just because a company has used the SEIS scheme, it does not mean it cannot go on to raise further funding with EIS – although the amount it can raise will be reduced to up to £4.85m.
If you are a company seeking investment, you have got to get a specialist tax adviser to help you acquire the necessary approval to do so, the tax relief accreditation letter and advance assurance.
You have either got to market it through a fund manager or a corporate finance house to high-net-worth individuals who are qualified to look at it.
For most of the EIS opportunities you need an introducer or specialist finance companies that will manage everything and probably have a roster of companies for which they want to raise money.
You must complete a separate application for each share issue and if your application is successful, HMRC will confirm the decision and send you compliance certificates to give to your investors.
Your investors cannot claim the tax relief until they receive their compliance certificate.
Is it successful?
Yes. The latest available HMRC statistics show that since EIS was introduced, 26,355 companies have received investment and almost £16.2bn of funds have been raised.
In 2015-16, 2,360 companies received investment through SEIS and £180m of funds were raised – similar to 2014-15, when 2,365 companies raised a total of £180m.
Are there other venture capital schemes?
There are four schemes in total. SEIS and EIS, plus Social Investment Tax Relief (SITR) and Venture Capital Trusts (VCTs).
SITR allows individuals to claim relief on £1m of annual investment and provides 30% of income tax relief.
VCTs allow an annual investment of £200,000 on which they can claim 30% tax relief. With VCTs no tax is payable on dividends where it is on SITR, SEIS and EIS.
Investors can get capital gains tax relief on any profits they make under all four of the schemes.
The rules of VCTs can be quite complex to navigate for both company and investor, so it’s best to get professional help.
Overall, these tax relief schemes are very attractive and can make it easier for companies to secure investment – as long as the rules are followed. HMRC stresses that tax reliefs will be withheld or withdrawn from investors if companies do not follow the rules for at least three years after the investment is made. So be sure to get expert and experienced help – to avoid getting your fingers burnt.
ABOUT THE AUTHOR
Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround. See: www.hymancapital.com