Knowledge Base: SEIS/EIS Guide

This article includes:

• What is SEIS
• What is EIS
• SEIS vs EIS: Key Differences
• Eligibility Criteria for SEIS
• Eligibility Criteria for EIS
• What Can a Company Use SEIS and EIS Funding For?
• How to Apply for SEIS and EIS Advance Assurance
• Required Documents for (S)EIS Application
• How long does it take to get approval for Advance assurance?
• Can you raise SEIS and EIS Funding simultaneously?
• Key Guidelines for Simultaneous Fundraising
• Practical Steps for Fundraising
• Importance of Compliance
• Changing from SEIS to EIS
• What Happens After You Close Your Funding Round?
• Maintaining (S)EIS Eligibility for Investors
• FAQ's

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are UK government-backed programs designed to encourage private investment in small, high-risk businesses by offering significant tax incentives to investors. Both schemes are aimed at helping early-stage and growing companies secure funding, contributing to innovation and economic growth. Here’s an overview of both schemes:

SEIS (Seed Enterprise Investment Scheme)

Purpose: The SEIS supports very early-stage companies by making them more attractive to potential investors. It’s designed to help companies raise initial capital during the first few years of their operations.

Eligibility Criteria:

• Companies must have been actively trading for less than three years.
• Must have fewer than 25 employees.
• Must have less than £350,000 in gross assets at the time of the investment.

Investment Limit: An individual investor can invest up to £200,000 in SEIS-eligible companies per tax year.

Tax Benefits:

• Income Tax Relief: Investors can claim up to 50% income tax relief on the amount invested, regardless of their marginal tax rate.
• Capital Gains Tax (CGT) Exemption: If the shares are held for at least three years, any profit made on their sale is free from CGT.
• Loss Relief: If the investment fails, investors can offset any losses against their income tax or CGT.

SEIS is ideal for backing startups that are at the idea or product development stage and need seed funding to get off the ground.

EIS (Enterprise Investment Scheme)

Purpose: The EIS is designed to support medium-sized startups that have progressed beyond the seed stage and are looking for larger amounts of capital to expand or scale their operations.

Eligibility Criteria:

• Companies must have been trading for less than seven years.
• Must have fewer than 250 employees.
• Must have less than £15 million in gross assets before the investment.

Investment Limit: An individual can invest up to £1 million in EIS-eligible companies per tax year.

Tax Benefits:

• Income Tax Relief: Investors receive 30% income tax relief on the amount invested.
• Capital Gains Tax (CGT) Exemption: After holding the shares for at least three years, profits from their sale are exempt from CGT.
• Loss Relief: As with SEIS, any losses can be offset against income tax or CGT.
• Capital Gains Deferral Relief: Investors can defer paying CGT on gains from the sale of other assets if those gains are reinvested in EIS shares.

EIS is better suited to companies that are past the initial startup phase, often generating revenue and seeking capital to scale their business operations.

SEIS vs EIS: Key Differences

Both SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) aim to encourage investment in high-risk, high-potential UK companies by offering significant tax benefits. However, they differ in the types of companies they cover and the level of tax relief they provide. Here's a breakdown of their differences:

SEIS is more suitable for investors looking to back very early-stage companies with high growth potential but higher risks. It offers higher tax relief (50%) but applies to smaller investments and earlier-stage businesses.

EIS is aimed at medium-sized startups that are past their initial launch but still need capital for growth. It offers lower tax relief (30%) but allows for much larger investments and applies to more established companies.

Both schemes provide excellent tax incentives and are designed to support UK entrepreneurship, with SEIS focusing on high-risk, early-stage investments and EIS supporting companies that are in the growth phase.

Eligibility Criteria for SEIS

To be eligible for SEIS funding, a company must:

• Be established in the UK: The company must be incorporated and have a permanent establishment in the UK.

• Engage in a new qualifying trade: The company must conduct a new business activity that qualifies under SEIS guidelines. Most trades qualify, except certain restricted activities (see below).

• Trading history: The company must have been actively trading for less than three years.

• Gross assets: The company must have less than £350,000 in gross assets at the time of investment.

• Employee limit: The company must have fewer than 25 full-time employees.

• Not a public company: It cannot be listed on a recognised stock exchange.

• No controlling interest: The company cannot be controlled by another company. Similarly, it cannot control another company, except for qualifying subsidiaries.

• Previous funding: The company must not have already received any funding under the EIS scheme before receiving SEIS funding.

Eligibility Criteria for EIS

To be eligible for EIS funding, a company must:

• Be established in the UK: Similar to SEIS, the company must be based and operating in the UK.

• Engage in a qualifying trade: The company must conduct a qualifying business activity, excluding certain restricted activities (see below).

• Trading history: The company must have been trading for less than seven years.

• Gross assets: The company must have less than £15 million in gross assets at the time of investment.

• Employee limit: The company must have fewer than 250 full-time employees.

• Not a public company: The company cannot be traded on a recognised stock exchange.

• No controlling interest: The company cannot be controlled by another company and cannot control other companies, except for qualifying subsidiaries.

Both schemes are intended for UK-based companies involved in qualifying trades, with some restrictions on the types of businesses that can apply.

What Can a Company Use SEIS and EIS Funding For?

SEIS and EIS funding must be spent on activities that directly contribute to the growth and expansion of the company, such as hiring, product development, or marketing. Companies must adhere to specific timeframes—three years for SEIS and two years for EIS—to use the funds effectively.

Click Here to see the HMRC guidance on the spending timeline.

How to Apply for SEIS and EIS Advance Assurance

SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) are vital for attracting early investment in UK companies. Many investors prefer to back companies that have received Advance Assurance from HMRC, which confirms their eligibility for tax relief. Here’s a step-by-step guide to applying for SEIS or EIS Advance Assurance.

1. Check Eligibility Ensure your company meets the eligibility criteria:

SEIS:

• Trading for less than three years.
• Fewer than 25 employees.
• Less than £350,000 in gross assets.

EIS:

• Trading for less than seven years.
• Fewer than 250 employees.
• Less than £15 million in gross assets.

2. Prepare Documentation

Gather the necessary documents:

• Business Plan/Pitch Deck: Outline your business model, vision, and strategy.
• Financial Forecasts: Include projected income, expenses, and growth.
• Details of Previous Funding: Mention any prior investments received.
• Unique Taxpayer Reference (UTR) Number: Your company’s UTR is needed for the application.

3. Apply for Advance Assurance

• Application Submission: Although Advance Assurance is not mandatory, it is highly recommended. You can apply through HMRC’s online service.
• Supporting Documents: Submit documents prepared for investors, specific forms required by HMRC, and any supporting documentation (e.g., company accounts and incorporation documents).

4. Submit a Compliance Statement

After successfully raising investment, submit a compliance statement using the SEIS1 or EIS1 form to HMRC to confirm your company meets all necessary requirements.

5. Issue Shares

Once you receive HMRC approval, you can issue shares to your investors. Ensure compliance with all regulations to maintain tax relief for your investors.

6. Maintain Compliance

Continue to meet the scheme’s requirements for at least three years post-investment to keep the tax reliefs valid.

Required Documents for (S)EIS Application

Your SEIS or EIS application will consist of four main categories of documents:

1. Investor-Focused Documents:

• Pitch deck or business plan.
• Minimum Three-year financial forecasts.

2. HMRC Forms:

Complete the necessary forms as part of your application submission.

3. Supporting Documentation:

• A copy of your latest accounts.
• Memorandum of incorporation and other legal documents.

4. Company Documentation:

• Articles of association.
• Subscription agreements and shareholders’ agreements

Applying for SEIS and EIS Advance Assurance involves verifying eligibility, preparing thorough documentation, submitting the application through HMRC, and ensuring compliance post-investment. Advance Assurance is a valuable step that enhances investor confidence and can significantly aid in fundraising efforts.

How long does it take to get approval for Advance assurance?

The approval time for SEIS and EIS Advance Assurance can vary. Generally, it takes between 15 and 45 working days for HMRC to process and approve an application. However, some applications might be approved faster, especially if all required information is provided accurately and in the preferred format.

To ensure a smooth process, it’s recommended to apply for Advance Assurance at least one to two months before you start approaching investors.

Can you raise SEIS and EIS Funding simultaneously?

Yes, you can raise SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) funding at the same time, but there are specific rules and timing considerations to follow. Here’s what you need to know:

Key Guidelines for Simultaneous Fundraising

1. Order of Funding:

• SEIS First: You must raise SEIS funding before you can move on to EIS funding. SEIS is aimed at early-stage businesses, so you cannot raise EIS funds first and then switch back to SEIS.

2. Funding Limits:

• Under SEIS, you can raise up to £250,000. Once you reach this limit, you can then proceed to raise EIS funding.

3. Timing Restrictions:

• No Same-Day Funding: You cannot raise SEIS and EIS investments on the same day. This means that you must ensure all SEIS shares are issued before starting the EIS round.

4. Issuing Shares:

• Share Certificates: Issue SEIS share certificates first, or appropriately date them. After all SEIS investors have completed their transactions, you must wait at least one day before accepting EIS investments and issuing EIS share certificates.

Practical Steps for Fundraising

1. Complete SEIS Round:

• Ensure that all SEIS investors have paid for their shares.
• Issue SEIS share certificates to all investors.

2. Wait for One Day:

• Allow at least one day to pass after the SEIS share issuance.

3. Initiate EIS Round:

• Begin accepting payments from EIS investors.
• Issue EIS share certificates after the SEIS process is fully completed.

4. Communicate Clearly:

• Inform all your investors about the timing and process to avoid confusion. Clear communication helps ensure compliance with HMRC rules and preserves the tax relief status.

Importance of Compliance

Failing to follow these guidelines can lead to the withdrawal of SEIS or EIS status for your company. Therefore, meticulous attention to timing and proper administrative processes is crucial to successfully raising funds through both schemes.

By adhering to these rules, you can effectively leverage both SEIS and EIS funding to support your company's growth.

Changing from SEIS to EIS

A business can transition from the Seed Enterprise Investment Scheme (SEIS) to the Enterprise Investment Scheme (EIS) by raising its initial investment with SEIS first, and then moving to EIS if it meets all eligibility requirements. A business can't raise its first funds with EIS and then switch to SEIS for a second round.

If your business is outside the eligibility criteria of SEIS – for example it is older than three years or with more than 25 employees – you must go the EIS route. Alternatively, if your company qualifies for SEIS, but you need more than £250,000, you could first go with SEIS and then with EIS.

What Happens After You Close Your Funding Round?

Once your funding round is closed and you’ve issued shares and share certificates to your investors, there are important steps to follow to ensure they receive their SEIS or EIS tax relief. Here’s what you need to do:

• You need to submit SEIS1 and/or EIS1 compliance statements to HMRC. These forms confirm that your company meets all the necessary requirements for the SEIS or EIS schemes.
• Ensure that the compliance statements are submitted promptly to HMRC. This is crucial for your investors to be eligible for tax relief.

Maintaining (S)EIS Eligibility for Investors

Maintaining (S)EIS eligibility is crucial for your investors. Here’s how to avoid common pitfalls:

Key Considerations

1. Time Limits:

• SEIS: Must begin trading within three years of share issuance.
• EIS: Similar rules apply but may differ in specifics.

2. Investment Sequence:

• Ensure all SEIS shares are issued before any EIS or Venture Capital Trust (VCT) shares.

3. Dual Fundraising:

• Avoid issuing SEIS and EIS shares on the same day. Communicate clearly with investors to prevent mix-ups.

4. Use of Funds:

• You can use SEIS funds to repay a director’s loan, but not EIS funds.

5. Holding Period:

• Shares must be held for a minimum of three years to maintain tax benefits.

6. Spending Investment:

• SEIS: Funds must be spent within three years.
• EIS: Funds should be spent within two years from issuance.

7. Changing Business Activities:

• Ensure that no more than 20% of activities fall under excluded categories.

8. Ownership Limits:

• An (S)EIS investor can hold a maximum of 30% of shares, including economic and voting rights.

9. Subsidiary Considerations:

• Creating or restructuring subsidiaries can affect eligibility. Seek expert advice.

10. Director Transactions:

• Shares can be sold to an individual before they become a director, ensuring compliance with ownership rules.

11. Share Preferences:

• Shares must not have preferential rights over dividends or assets. Ensure restructured shares comply with this rule.

12. Investment Sources:

• EIS benefits are only available if the investor has not previously received non-VCT shares.

You should regularly review compliance with (S)EIS rules to protect your investors' tax benefits. Clear communication and strategic planning are essential to avoid jeopardizing eligibility.

FAQ's

Are Capital Gains Tax applicable from proceeds of all shares I own on an exit, or just the shares obtained from and S/EIS investment?

Only the shares covered by SEIS would be CGT exempt. The trick is to get SEIS in all of your shares, of course.

Can you ‘invest’ in your own business and benefit from SEIS Tax relief on a personal tax return?

The short answer is no - you can’t. And, whereas Entrepeneur’s relief used to give you a 10% capital gains tax rate on the first £10m you make selling your shares as a founder, that has now been slashed to the first £1m only.

There is something you can do though:

Your siblings, friends or in-laws can invest in your startup - these are the few associates of yours that can qualify, as spouses, parents and children cannot. When asking associates of yours if they’d like to invest, be careful not to agree to something reciprocal. You cannot use SEIS to invest in something in return for receiving investment.

One of the more elegant use cases for SEIS is to bring additional directors into the business because they can invest in the business under SEIS. As long as they are investing a suitable amount (and there’s some interesting challenges from HMRC in this area), but if they're investing say £2000, or a sum that can be meaningfully used by the business, as long as they're not an employee or director already it's fine. Our CEO and founder Sam Simpson, actually did this in his previous company whereby Sam and his co-founders all invested into the business under SEIS in order to give the company some working capital to get it moving.

We have had our Advance Assurance for a few years but not used any of it - does it have an expiry date to it?

No, as long as you remain compliant with the rules, it doesn’t go stale.

Does SEIS have a time limit?

Once you begin trading, a three-year countdown starts. However, if you're not yet trading, this clock hasn’t started, meaning companies with substantial R&D phases can be nearly a decade old and still qualify for SEIS, provided they meet the necessary criteria.

Once trading begins, there’s no pause; the timeline is fixed. SEIS eligibility also depends on factors like the number of employees, assets, and company age. These requirements are assessed only at the moment you secure investment.

If we launched an MVP in 2021 (before obtaining AA) that generated a small amount of revenue but hasn’t been traded since, how does that affect the 3-year trading period?

Once trading has started, the 3-year period begins, and there’s no way to "pause" it. Even if trading was minimal or infrequent, the clock starts from the first revenue-generating transaction.

How is ‘trading’ defined? Does it only involve generating revenue? For instance, if a consumer app initially focuses on user growth with a free product, does that mean trading hasn’t started?

Trading generally begins when you make an effort to sell or generate revenue. If you’re simply distributing a product for free and not attempting to sell or monetize it, this usually wouldn’t be considered trading.

Is it necessary to activate Corporation Tax to qualify for Advance Assurance?

No, the only requirement is to have a UTR (Unique Taxpayer Reference).