Guide to SEIS and EIS

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What is SEIS and EIS and Why Should I Bother?

Right, brew yourself a pot of coffee because this isn't going to be the most interesting article you've ever read. It is, however, one of the most important because SEIS and EIS tax relief is a must for nearly all early stage tech investors. It's free money for them, and makes it easier for you to raise investment.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government schemes that help smaller higher-risk trading companies raise finance by offering various degrees of tax relief to investors who purchase new shares in those companies.

Quick disclaimer: This is a primer on what SEIS/EIS is, and not a complete guide. If needed you should seek guidance from a professional such as your accountant.

Who Qualifies?

There are a few trading activities that disqualify some companies, but nearly all early-stage tech startups will qualify for SEIS or EIS. For more info on which you qualify for, read on (this criteria taken directly from gov.uk).

For SEIS

You are able to raise up to £150k under SEIS if you might the following criteria:

  • Must be unquoted at the time of issue of the shares.
  • Fewer than 25 employees.
  • No more than £200,000 in gross assets. If the company is the parent company of a group, that figure applies to the total gross assets of the company and its subsidiaries. Shares in, and loans to, subsidiaries, are ignored for this purpose.
  • No prior investment from Venture Capital Trust (VCT), or issued any shares under Enterprise Investment Scheme (EIS).
  • The £150k must also take account of any other State Aid received by the company in the 3 years preceding.
  • Must not be trading longer than 2 years. This condition applies whether the trade was first begun by the company, or whether it was first begun by another person who then transferred it to the company. The company must not have carried on any other trade before it started to carry on the new trade.
  • Must not be controlled by another company.
  • Not conducting a restricted trading activity.

For EIS

Companies can raise up to £5m in total in any 12 month period under EIS, provided they meet the following criteria:

  • Assets of less than either £15m pre-investment or £16m post-investment.
  • Fewer than 250 full-time employees (or their equivalents) at the time the shares are issued.
  • Must not control (or have plans to control) another company without that company being a qualifying subsidiary at the time of investment.
  • Must not be controlled by another company.
  • If the company does have subsidiaries they must all be qualifying subsidiaries, (eg the company has more than 50% of the ordinary share capital of the subsidiary, and it is not controlled (by other means) by another company)
  • Not conducting a restricted trading activity.

What Does the Investor Get?

SEIS and EIS are a pretty good deal for investors, which is good for you as a startup as it encourages more people to invest in and support startups, with the view that this leads to broader economic growth and job creation.

It is good to know what this relief is, in case you are pitching to new angel investors who are not fully aware of the SEIS/EIS scheme.

For SEIS:

Investors must hold the shares for a period of 3 years to retain the relief, and the qualifying conditions laid out above must continue to apply. If they do then:

  • Reduce their tax bill by 50% of the cost of the shares (based on maximum £100k investment per year) in the year of the investment.
  • Any profit is free from capital gains tax.

For EIS:

  • Reduce their tax bill by 30% of the cost of the shares (based on maximum £1m investment per year) in the year of the investment.
  • Any profit is free from capital gains tax.
  • Offsetting any potential loss in value of the shares against their income tax bill.

Ok, Great... How Do I Apply?

Now the real fun begins! You can apply for advanced assurance from HMRC, that way you can go out to the market knowing that potential investors will qualify for the tax benefits.

To get started, head over to HMRC's online application here

We aren't going to lie to you, it is a bit of a pain. However, you absolutely need to have EIS or SEIS advanced assurance in order to raise money with nearly all early stage angels and VCs.

Some of the things you will need prior to filling out the application:

  • Your tax reference number
  • Companies house number
  • Amount you intend to raise (approximately)
  • The following documents:
    • Latest company accounts
    • Details of all trading or other activities to be carried out
    • Latest draft of your pitch to investors (deck, business plan, investor memorandum, etc).
    • Copy of the Memorandum and Articles of Association with details of any changes to be made
    • Details of any subscription agreement or other side agreement to be entered into by the shareholders
    • SEIS applications only:
      • Details of any other ‘de minimis aid’ (government aid) such as grants.
      • Confirmation that no shares which qualified for EIS or VCT have previously been issued.