Business
A crucial part of the business plan for many start-ups is attracting the investment they need to grow the business. This can be tricky as start-ups and young companies are often viewed as a risky investment as they have little history and no proof not only of concept, but being able to turn the concept into a profitable business.
To encourage investment in these companies the Government has two schemes to help, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
For companies that meet the qualifying criteria they offer investors a range of generous tax reliefs’ to make investment more attractive and mitigate some of the risk.
The SEIS is focussed on very early stage companies: it offers greater tax relief to the investor but has a limited investment cap for the company of £150,000. The company must have been trading for less than 2 years and have less than £200,000 of assets to begin to qualify.
The EIS is focussed on SME’s and offers slightly reduced relief for investors but the company can raise up to £12m (£5m a year), providing your company has been trading less than 7 years and has less than £15m of assets.
A company can qualify for the EIS even if it has received investment under the SEIS but not the other way round.
Below we will cover the key differences between the two schemes, for companies and investors.
An important point to understand is that an investor can only claim relief once full HMRC approval has been given and a certificate issued. This can only be applied for 4 months after your company has started trading or once 70% of the investment has been spent (SEIS only). For some companies this could be two years down the line, so it is important to set realistic expectations for your investors.
The investor can invest up to £100,000 per year and providing they hold the shares for 3 years, they will be entitled to the following tax relief:
• 50% Income tax relief on investment
• No Capital Gains Tax (CGT) to pay on the sale of your shares
• 50% CGT write off for other investments
• No Inheritance Tax (IHT) to pay
• If shares are sold at a loss this can be offset against income tax or CGT
• Ability to carry back investment to previous tax year
The investor can invest up to £1,000,000 per year and providing they hold the shares for 3 years, they will be entitled to the following tax relief:
• 30% Income tax relief on investment
• No Capital Gains Tax (CGT) to pay on the sale of your shares
• 100% CGT write off for other investments
• No Inheritance Tax (IHT) to pay
• If shares are sold at a loss this can be offset against income tax or CGT
• Ability to carry back investment to previous tax year
There is very strict criteria your company must meet in order for the investment to qualify, whether you are applying for SEIS or EIS you must meet the below criteria:
• Permanent establishment in the UK
• Unquoted company
• Isn’t controlled by another company
• Doesn’t control another company unless a qualifying subsidiary
• Less than 25 employees when shares are issued
• Carry out a qualifying trade
In addition to the above there are specific requirements depending on which scheme you are applying for, covered below.
• Less than 2 years trading
• Less than 25 employees
• Assets of less than £200,000
• Not have received investment through EIS or from a VCT
• Less than 7 years trading
• Assets of less than £15m
• Less than 250 employees when shares are issued
The following trades are excluded and not permitted to use either SEIS or EIS:
Any trade excluding:
• 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
There are a further set of complex rules for Knowledge Intensive Companies applying for EIS, if the company meets the qualifying criteria they can receive up to £20m lifetime investment, £10m p.a.
The qualifying criteria is also relaxed slightly allowing companies with up to 499 employees to qualify.
The rules are long and complex for both schemes and there are many pitfalls. Given the importance of HMRC approval of the scheme to investors it makes sense to hire an expert to guide you through the process.
We can discuss your plans, check you meet the qualifying criteria and take care of all the applications for you all the way through to obtaining the investment and even ensuring you stay on track throughout the following 3-5 year period where the relief can be withdrawn.
Book a discovery call to find out how we can help.
