Every small business needs funding, and luckily, the UK has two excellent schemes to support small and emerging businesses – the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS).
These government tax relief funds help investors recover proportions of the money they invest in small businesses, thus creating more opportunities for investment and helping small businesses get the support they need in the early years.
So far, the schemes have yielded promising results – there are 40,000 start-ups as of today, making it the country with the third-highest startup efforts globally. More startups also attract foreign investors who want to nurture UK talent, which is excellent for the economy.
So, what are SEIS and EIS schemes?
SEIS is a fund that caters to earlier-stage companies by giving them the money they need to grow and expand. It was started in the UK in 2012 and comes with multiple benefits for the investor, including:
- Exemption on CGT from the sale of any shares of the startup, as long as the shares have been held for at least three years
- Inheritance tax-free shares as long as they have been held for a minimum of two years
- Income tax relief of 50% of the invested amount, up to £100,000 every year
- Option to offset shares sold at a loss against income tax or CGT
- Capital Gains Tax write-off worth 50% of the amount invested
On the other hand, EIS is a fund designed for more mature businesses seeking to grow. Established in 1994, this is a more well-known fund in the UK and allows investors to invest up to a million pounds per year (increasing to £2 million if at least £1 million of that is invested in knowledge-intensive companies). The benefits for investors include the following:
- Option to carry back all or part of the investment amount in the year before the investment
- Ability to defer up to 100% of the investment amount against CGT incurred up to a year before or three years after the disposal
- Option to offset shares sold at a loss against CGT or income tax
- Exemption on CGT for the sale of shares held for at least three years
- Inheritance tax-free shares if they have been held for at least two years
Why do they matter for a UK startup?
It is easy to think of initiatives like EIS and SEIS as more paperwork for you. However, these schemes allow your investors to recover significant portions of the money they invested in your business.
This increases their potential return on investment if things go well and also reduces their losses by large percentages (30% for SEIS and 40% for EIS) if things go south, which gives them much more incentive to take a bet on you.
In fact, many angel investors require small businesses to be eligible for EIS or SEIS before they put their money down. So if you meet the criteria, make sure you apply in advance and ask a professional if you need extra clarification.
How does a startup qualify for SEIS and/or EIS?
SEIS allows you to raise up to £150,000 in total over the lifetime of your startup. To qualify for SEIS, your business needs to meet specific criteria:
- Must have fewer than 25 employees
- Must be unquoted at the time the shares are issued
- Must not be engaged in any restricted trade activity
- Must not have been trading longer than two years (this includes any trades that a founder may have made earlier and then transferred to the company)
- Must not have any shares issued under EIS
- Must not have prior support from Venture Capital Trusts (VCTs)
- Must have under £200,000 in total assets, including the assets of any subsidiary companies
- Must not be controlled by another company
- The £150,000 must include any State funding (such as grants) received in the three years prior
Under EIS, your company can raise up to £5 million in any 12 months and up to £12 million over the company’s lifetime. The qualifying criteria are:
- Must have fewer than 250 employees
- Must not control any other company apart from qualifying subsidiaries
- Must not be controlled by any other company
- Must not be engaged in any restricted trading activity
- Must have assets of less than £15 million (pre-investment) or £16 million post-investment
- Must not have been trading for more than seven years (this becomes ten years for knowledge-intensive companies, usually defined as those with high R&D costs)
How should a UK startup apply for EIS/SEIS?
To apply for either of these, you will need ‘advance assurance’ from HMRC. This gives you pre-approval that your upcoming share fundraiser will qualify and you can use this to show potential investors that an investment may qualify for a scheme.
The application itself is relatively simple. You will need to include a business plan, details of your proposed funding and the name of at least one investor who has agreed to work with you.
Response times can range between two days and two weeks, so plan accordingly. And once the fundraising is done, you will need to hand in another form to the HMRC to help your investors claim their relief.
Over to you
The owners of qualifying companies should keep an eye on the relatively short list of items that have the potential to disqualify them. If there is even a sliver of doubt, they must consult a tax expert like Birdfynn Accountants.
We understand how finding the right funding for your business will always take work. That is why we take the responsibility so seriously.
We will review your business and its circumstances to assess which scheme would be suitable, Check if you fulfil HMRC’s SEIS/EIS/VCT eligibility criteria, advise you of a proper share structure for the business, and deal with the issue of shares to investors and update details with the Companies House among other things.
Let us explore how working with Birdfynn Accountants can be a big win for your business. We would love to learn more about what you want to accomplish—and why—with the funding. Please drop us a message here.
