Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are schemes designed to help small or medium sized companies raise money by offering tax reliefs to individual investors.
You can ask HM Revenue and Customs (HMRC) to check if your proposal to raise money is likely to qualify before you go ahead. This is called ‘advance assurance’.
Seed Enterprise Investment Scheme (SEIS)
SEIS is designed to help your company raise money when it has been trading for less than two years. Your company can receive up to £150,000 which:
- includes any other de minimis state aid received in three years up to and including the date of the investment
- will also count towards any limits for later investments through other similar schemes.
You can apply under SEIS if your company:
- carries out a new qualifying trade
- is established in the UK
- is not trading on a recognised stock exchange at the time of the share issue
- has no arrangements to become a quoted company or a subsidiary of one at the time of the share issue
- has gross assets of no more than £200,000 at the time of the relevant share issue - this includes the group’s assets if your company has subsidiaries
- does not control another company unless that company is a qualifying subsidiary
- is not a member of a partnership - any qualifying subsidiary cannot be either
- is not controlled by another company, acting with or without other people - this applies from the date your company is incorporated
The company also need to have less than 25 full-time equivalent employees at the time the shares are issued. If your company has any subsidiaries, this applies to the whole corporate group.
If the company received investment either through the EIS or from a venture capital trust, the company wont be able to use SEIS.
The money raised must be spent within 3 years from share issue on the qualifying business activity it was raised for, which includes preparing to carry out a qualifying trade and research and development that is expected to lead to a qualifying trade.
Enterprise Investment Scheme (EIS)
EIS is designed so that your company can raise money to help grow your business. Your company can receive up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other similar schemes.
You can apply if your company:
- carries out a qualifying business activity
- is established in the UK
- is not trading on a recognised stock exchange at the time of the share issue
- has no arrangements to become a quoted company or a subsidiary of one at the time of the share issue
- has gross assets of £15 million or less before any shares are issued and not more than £16 million immediately after these are issued
- made its first commercial sale less than 7 years ago - this time runs from the date of your first sale or supply for profit rather than merely opening for business
- does not control another company unless that company is a qualifying subsidiary
- does not have more than 50% of its shares owned by another company.
The company also have to have fewer than 250 full-time equivalent employees at the time the shares are issued.
There are some different rules if your company carries out research and development or innovation.
The money raised by the new share issue must be used within two years of the investment, or if later, the date of the start of trading for an existing qualifying business activity, which includes preparing to carry out a qualifying trade, and research and development that is expected to lead to a qualifying trade.
Your company can apply as a ‘knowledge intensive company’ if at the time of the share issue your company is carrying out research, development or innovation. This means you can attract up to £20 million in the lifetime of your company, and your company can have fewer than 500 employees, instead of the usual 250 and been trading for at least 4 months but no more than 10 years, instead of the usual 7 years. The extra conditions are:
- that the amount of overall operating costs spent on research and development or innovation must be at least either 10% in each of the 3 years before the investment, or 15% in any one of those 3 years
- your company must either be carrying out work to create intellectual property and you expect the majority of your company’s or group’s business will come from this within 10 years, or have 20% of your employees carrying out research and development as well as having a relevant Master’s or higher degree.
If your company owns subsidiaries they need to be ‘qualifying subsidiaries’. This means:
- your company must own more than 50% of the subsidiary’s shares
- no one other than your company or one of its other qualifying subsidiaries can control the subsidiary
- there must be no arrangements which would put someone else in control of this subsidiary.
The subsidiary must be at least 90% owned by your company where either:
- the business activity on which the EIS funds is going to be spent is being carried out by the qualifying subsidiary
- the subsidiary’s business is mainly property or land management.
Trades that qualify
Most trades will qualify, including any research and development which will lead to a qualifying trade. However your company may not qualify if most of the trade includes things like:
- coal or steel production
- farming or market gardening
- leasing activities
- legal or financial services
- property development
- running a hotel
- running a nursing home
- generation of electricity, heat, gas or fuel.
Conditions for tax relief under the schemes
There are various conditions to meet for tax relief under the schemes.
Investors: Investors and their associates cannot hold a total of more than 30% of the shares, assets or voting rights of the company, or be employed by the company.
Associates are defined as:
- parents, grandparents and great-grandparents
- children, grandchildren and great-grandchildren
- spouses and civil partners
- business partners
- trustees of settlements where you are the settlor or beneficiary.
Directors: If you are a director of the company, you may still be able to claim tax relief on the investments that you make through:
- SEIS
- EIS if certain payments, for example, payments or reimbursement of expenses are received as part of your duties.
If you are a paid director, you may still be able to get EIS tax relief if either:
- you were issued with SEIS shares whilst a paid director of the company in its SEIS stage, and the new share issue is within 3 years of the SEIS share issue
- the EIS or subscriber shares were issued to you before you became a paid director and the new share issue is within 3 years of either the earlier EIS share issue or date the company began trading or carrying on the research and development which will lead to its trade.
Shares: The ordinary shares must be paid up in full, in cash, when they are issued. A loan linked to the company cannot be used to buy the shares. The shares can have limited preferential rights, but dividends cannot be varied by the company, shareholder or other person, or be cumulative.
When the shares are issued there cannot be an arrangement:
- to protect the investment
- to sell the shares at end of, or during, the relevant period
- to structure the company’s activities to let investors benefit from a venture capital scheme
- for a reciprocal agreement where the company’s owner invests back in an investor’s company to also gain tax relief.
Investors will not be able to claim income tax relief for new shares issued since 18 November 2015 and investors already held other shares in the company that were not subscriber shares, or shares in relation to which the investor has received a form EIS3.
Tax relief for investors
Income tax relief: Investors can claim income tax relief based on the amount invested in newly issued shares. The income tax relief can be claimed in the year of the investment or carried back to the year before the investment.
- SEIS investors can claim income tax relief of 50% up to an annual investment of £100,000
- EIS investors can claim income tax relief of 30% up to an annual investment of £1 million.
Reinvestment relief for SEIS: SEIS investors have a 50% relief from capital gains tax on gains arising from sale of assets up to £100,000 which is reinvested in SEIS shares. Investors must sell the asset in the same year that income tax relief is claimed, but investors do not have to sell the asset before investment in the SEIS shares.
Deferral relief for EIS: Investors do not have to pay capital gains tax immediately if investors use the money from the sale of an asset to buy EIS investments. Tax will need to be paid if:
- the investor dispose of the investment
- the investment is cancelled, redeemed or repaid
- the company stops meeting the scheme conditions
- the investor becomes non-resident.
Capital gains tax exemption: Investors do not have to pay any capital gains tax when investments are sold if:
- income tax relief has been claimed
- the investments have been held for at least three years
- the investments have not been withdrawn.
Loss relief: If investors sell the investments at a loss investors can set the loss amount, less any income tax relief already given, against income or capital gains. Loss relief can be applied to the year that the investments are sold or the year before.
Investors will need to keep their whole investment that qualifies for EIS and SEIS for three years to claim the full tax reliefs available.
Are you thinking about using SEIS or EIS to fund your company?