If you’re new to the world of start-ups and small businesses, you’ve probably heard the terms EIS and SEIS thrown around amongst the multitude of jargon used all too regularly in the industry. Well don’t dismiss these tax reliefs as another pointless acronyms just yet; SEIS and EIS can be invaluable to both a small business and someone looking to invest in one.
EIS and SEIS stand for Enterprise Investment Scheme and Seed Enterprise Investment Scheme respectively. They’re essentially government incentives whereby an individual can obtain tax relief for investing money in a small business. They were introduced to facilitate and promote investment into growing companies that might otherwise be deemed too risky to invest in.
We’ll take a look at both schemes below from the perspective of both the investor and the business.
Each year, an individual can invest a maximum of £1 million in registered EIS companies and in return, HMRC will provide a repayment of 30% in the form of tax-relief assuming sufficient income tax has been paid to cover this.
For example, if an individual invests £100k into an EIS-eligible company, they can obtain tax relief of £30k as long as at least this much has been paid in income tax in the current and/or previous tax year.
SEIS is catered to smaller, and therefore it’s assumed, riskier companies. For this reason, investors get greater relief for their investment, receiving a tax repayment at 50% rather than 30%. However, the maximum amount one can invest is restricted to £100k a year, and thus relief is limited to £50k.
Although immediate tax-relief on investment is the headline-grabbing benefit, there are a few others that can prove to be quite valuable:
- Loss relief: If things go south and in years to come the business doesn’t turn out to be the next Facebook, the future loss made on the investment can be offset against your future income, reducing the income tax you’ll pay in that year (for example on your salary).
- Capital Gains: When the time comes to sell your shares, any gain on their value will be out of reach of the taxman.
- Inheritance Tax: Once you’ve held your shares for at least two years, they’ll be exempt of any inheritance tax. Not much use to you but great for the loved ones.
Now you might be thinking this is all great for the investor, but what’s in it for the business? The simple answer is, it makes it easier to get investment. With so many start-ups bootstrapping (a term we could easily add to the list of jargon mentioned above), funding is often priority number one for a founder. If that’s you, ask yourself what’s going to be more attractive to an investor? The opportunity that provides nothing but horrendously illiquid shares or the one that returns up to 50% of their investment in cold hard cash within twelve months?
To be eligible for either scheme, the company must be trading (or intending to begin soon) and have a permanent establishment in the UK. Across both schemes (as well as VCTs (there’s some annoying jargon to Google)) a company can typically raise a maximum of £5m of investment a year, up to a lifetime limit of £12m.
To qualify for EIS, a company must have fewer than 250 employees and gross assets of less than £15m (prior to investment).
An SEIS-eligible company must have a maximum of 25 employees and gross assets not exceeding £200,000. As you can see, investing in an SEIS business is far from a safe bet but you can be rewarded handsomely for doing so.
Applying for the scheme
Although not necessary, a number of businesses like to apply for advance assurance from HMRC that they will qualify for the scheme prior to obtaining investment. This used to be a relatively straightforward process, but to reduce every start-up with lofty ambitions applying, HMRC now require that you have a named potential investor on your application.
Once you’re confident the business will qualify for (S)EIS, the next step is to issue shares to your investors. A few short forms later and some box-ticking on their tax returns, your investors will be ready to receive their tax relief.
Considering HMRC are involved, it’s not too complicated!
Unfortunately, like all good things, there are a few restrictions. Below are the main ones likely to be a stumbling block for eligibility:
- Firstly, there are a number of disqualifying trades including but not limited to property development and providing legal and accountancy services.
- The company must spend the money within three years of the share issue, and must be spent on a qualifying business activity (no spending it on Christmas parties…)
- The investor must not be “connected” to the company two years before or three years after the shares are issued. You’re connected if you’re an employee of the company (or directly related to one), or hold more than 30% of the company’s shares/voting rights.
- The investor must hold their shares for a minimum of three years. Otherwise HMRC will clawback any relief obtained.
Need a hand?
Hopefully this article has provided a brief outline of both schemes and the benefits they provide. However, it by no means covers the finer points of either scheme so we strongly suggest speaking to an expert before moving forward either as an investor or a business.
At Leap Accounts, we’re available to help with any EIS/SEIS issues your business is facing. We’re also happy to help with any other accounting or taxation queries you might have so please get in touch.
Contact us on 0203 290 7302 or firstname.lastname@example.org.