TTR Barnes

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are two key venture capital schemes, set up by the government, that offer tax relief for investors in small and medium sized companies.  This guide gives an overview of how they work and could be leveraged for both investors and companies.

Aim of EIS and SEIS Schemes

The aim of both EIS and SEIS is to encourage investment in SMEs by offering tax reliefs to individual investors who may buy shares within a company.

By offering a tax relief for investment in companies of this size, the government is incentivising investors to place their money into smaller, potentially riskier companies.  This encourages a source of investment for companies that may not be as attractive to investors were it not for the tax relief that they offer.

The Enterprise Investment Scheme (EIS)

Company Responsibilities

Under EIS, a company can raise up to £5m investment per year, up to a lifetime maximum of £12m (across all venture capital schemes).  The company must receive the investment within the first 7 years of its commercial sale and qualifying conditions must be met for a minimum of 3 years after the investment, otherwise investors risk losing their tax relief.  In addition, the company must have less than 250 employees and maximum gross assets of £15 million at the time of investment.

The money raised from the investment must go towards a qualifying business activity under one of the following conditions:

• A qualifying trade.  (A full explanation of qualifying and non-qualifying trades can be found here).
• Preparing to carry out a qualifying trade (which must start within 2 years of the investment).
• R&D that is expected to lead to a qualifying trade.

All money raised by the investment must be used within 2 years of it being received and it can not be used to purchase another business, either in full or part.

Your company can use the scheme if it meets the following qualifying conditions:

• There is a permanent UK establishment.
• The company is not trading on a recognised stock exchange.
• There is no control of another company aside from qualifying subsidiaries.
• The company is not controlled or has more than 50% of its shares owned by another company.
• There are no plans or expectations to close following a project(s).

Investor Benefits of EIS

There are a number of tax relief benefits available to an investor using EIS:

• Investors can receive Income Tax relief of 30% on their investment, meaning a £100,000 input could yield a £30,000 reduction in their Income Tax bill.
• An investor will pay no Capital Gains Tax on any profits made from an EIS investment.
• If an investor makes a loss through their investment, then this loss can be offset against Income Tax.
• An investor has no IHT to pay on shares that are bought under EIS conditions.

Rules & Regulations for EIS Investors

• A maximum of £1m can be invested in any number of qualifying companies in each tax year.
• The shares must be held for a minimum of 3 years, otherwise the investor may have to pay back the relief they benefitted from.
• EIS tax relief cannot be carried forward.
• The investor must be a UK tax payer.
• The investor can not be connected to the company involved (e.g. employee, partner or Director).
• The shares must be brand new and not already on the market.
• The investment must meet the “risk to capital” condition i.e. The investment must be used for growth and development and be a risk to the investor’s capital.

The Seed Enterprise Investment Scheme (SEIS)

The primary difference between the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) is that SEIS has been developed to focus more on fledgling or “seed” stage companies.   SEIS is a newer scheme, set up in 2012, and is similar to EIS but provides even more attractive tax reliefs for potential investors.  SEIS is designed to help companies raise money at the point of starting to trade.

Company Responsibilities

A company can raise a maximum of £150,000 through SEIS investment and the business must also be less than 2 years old.

A company can use the scheme if it meets the following qualifying conditions:

• It carries out a new qualifying trade (further details of qualifying trades can be found here).
• It is established in the UK.
• It doesn’t trade on any recognised stock exchange at the time of investment.
• It has no plans to become a quoted company at the time of investment.
• It does not control any other company (unless that company is a qualifying subsidiary).
• It is not and has not been controlled by any other company since its incorporation.

The company and its subsidiaries must not:

• Have gross assets over £200,000 at the point of investment.
• Be a member of a partnership.
• Have more than 25 full-time equivalent employees in total when the shares are issued.

If a company has already received investment through the Enterprise Investment Scheme (EIS) or from a venture capital trust, then it cannot use SEIS.

Investor Benefits of the Seed Enterprise Investment Scheme (SEIS)

• An investor can claim back 50% Income Tax relief for the investment.
• There is no Capital Gains Tax to pay on any profits.
• There is no IHT to pay.
• Loss relief can be claimed against Income Tax in the same way as with EIS.
• An investor can also claim Capital Gains Tax Reinvestment relief, whereby a previous investment that brought financial gains can be reinvested into a SEIS-qualifying company to benefit from the 50% reduction in CGT.

Rules & Regulations for SEIS Investors

• The maximum that an individual can invest through SEIS is £100,000 in any tax year.
• An investor cannot be associated with the company that they invest in (e.g. employee, partner, Director).
• An investor must hold the shares for a minimum of 3 years.
• An investor can not own more than 30% of the company.
• An investor must be a UK tax payer.
• The tax relief cannot be carried forward.
• The shares must not have been issued earlier than 6/4/12.
• The investment must meet the “risk to capital” condition i.e. The investment must be used for growth and development and be a risk to the investor’s capital.

Need to know more?

For comprehensive details and how to participate in EIS or SEIS schemes as either a company or an investor, you can visit the government website in the first instance.

Using EIS as a company:

https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme

Using SEIS as a company:

https://www.gov.uk/guidance/venture-capital-schemes-apply-to-use-the-seed-enterprise-investment-scheme

Tax Reliefs for Individual Investors in both EIS and SEIS:

https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors

In all instances, we would recommend seeking professional advice from your accountant, financial advisor or professional before making any investment or financial decision about your company.    

This guide is intended as a brief overview and introduction to both EIS and SEIS and does not constitute any financial advice.  If you would like to talk further about opportunities for you or your business please contact one of our team or one of the team members at our sister company Key Wealth. Information correct at time of publication April 2019.