10 Things you Didn't Know About EIS and SEIS Tax Relief
What is SEIS Tax Relief
The Seed Enterprise Investment Scheme (SEIS) was introduced by HMRC to help small businesses raise capital. Individual investors are awarded tax relief on any investments into a qualifying company. SEIS tax relief applies only to individual investors (not companies/funds). For the investment to qualify for tax relief, investors must not be ‘connected’ to the company through a financial interest or employment.
What is EIS Tax Relief
The Enterprise Investment Scheme (EIS) works by awarding 30% of the amount paid for company shares by an investor, as a credit that reduces the investor’s individual income tax in the year that the shares are purchased. This scheme incentives purchasing shares in these companies. For this reason, it’s great for attracting investors.
SEIS vs EIS - the differences
Although similar, there are some differences between these two tax relief schemes. Both are based on their eligibility requirements and have their benefits, and these should be fully understood before deciding which scheme to utilise.
SEIS is explicitly aimed at startups and early stage companies. The EIS on the other hand can be used by larger companies, although these eligible companies would still be small in the wider context of the UK marketplace.
10 things you didn’t know
1. The SEIS allows investors to receive 50% income tax relief on the cost of the shares purchased. For every £1 invested, HMRC will refund 50p to the investor, (regardless of the investor’s income tax rate). An investor can invest up to £100,000 per year through SEIS.
2. Both schemes (SEIS and EIS) drive early investment rounds in the UK. Established in 1992 (EIS) and 2012 (SEIS) respectively, these schemes were created to influence the private investor market and empower UK innovation and economic growth. Currently, the UK has one of the most active markets for angel investment. The UK Business Angels Association states that 90% of angel investors have invested through the EIS or SEIS. The introduction of these schemes has encouraged annual investment of around £1.5bn.
3. Overseas companies can benefit from both SEIS and EIS. As long as the company has a UK branch/subsidiary and can pass the HMRC permanent establishment test, it may be able to take advantage of these schemes. However, there are eligibility rules regarding plans to go public and the number of gross assets owned, amongst others, so eligibility should be investigated thoroughly. Especially if ownership and company structure isn’t straightforward.
4. Investors must be UK taxpayers to claim SEIS or EIS income tax relief. Investors will not be eligible for either SEIS or EIS if they’re connected to the company.
5. The rules on the maximum age of the business were introduced in 2015. What’s important is the age of the underlying business, not the age of the business. The limit for taking part in the schemes is 7 years, but that’s not the whole story. In cases where the company is more than 7 years old, an investment may still qualify, if the company is raising capital to launch a new product or enter new markets. To qualify, HMRC must consider that the new product or market represents a real risk for an investor.
6. Many UK startups qualify as a knowledge intensive company. These companies are given special status when it comes to both SEIS and EIS. They can raise almost double the lifetime funding limit of EIS (£20m as opposed to £12m), and the fundraising window is also longer (10 years instead of 7 years).
A business can qualify as acknowledge intensive company if:
15% of operating costs are spent on innovation, research or development during 1 of the last 3 years. Plus, 10% of operating costs in each of the previous 3 years leading up to that year.
A minimum of 20% of the company’s employees hold a higher education qualification and the work they’re employed to do has a direct relation to that subject.
7. SEIS and EIS investors pay no capital gains tax upon disposal of shares, as long as the company qualifies for SEIS/EIS for 3 years.
8. For companies to be eligible for SEIS, they must have total gross assets valued at no more than £200,000. To fundraise through the EIS, a company must have no more than £15 million in total gross assets.
9. Director (and third party) loans can be repaid under the SEIS but not EIS. As long as the loan was used for trade and is not linked to an investor in any way, investors can agree that loans will be repaid to founders and third parties in the future.
10. SEIS and EIS shares obtained by investors must be ordinary shares with no preferential rights. The shares must be fully paid for in cash and upfront.
The SEIS and EIS were purposed to increase investment in small businesses and drive innovation in the UK. By offering a range of benefits, including income tax relief and capital gains tax advantages, the schemes balance risk and reward and make fundraising easier for small businesses. Understanding eligibility for both investors and businesses can be tricky, and professional advice should always be sought in uncertain circumstances, such as when exiting a scheme and looking to take advantage of tax relief.
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