While many investors know about the generous tax benefits associated with the SEIS/EIS, business owners are often left thinking their company is ineligible, the application process is too complicated, or it doesn’t benefit their business.
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government-backed schemes that encourage investment in seed and early-stage companies.
In a nutshell, SEIS and EIS allow you to use some of the equity in your business for investment to fund your vision to grow and develop. With zero repayments to investors.
They’re hugely popular for both business owners and investors, as these often ‘riskier’ early-stage companies can find it hard to attract the investment they need to grow and develop (we’ll talk about this later).
And investors receive generous tax reliefs upfront, as well as further relief, should the company they back fail. And if the company is a success, there’s zero Capital Gains Tax on share profits if the shares are held for at least three years.
But I doubt my company is eligible...
You’d be surprised. Due to the popularity of the schemes, the eligibility criteria is quite broad, with the key differences being:
- Trading for less than 2 years
- Fewer than 25 full-time equivalent employees
- Under £200,000 in gross assets
- Trading for less than 7 years
- Fewer than 250 full-time equivalent employees
- Under £15m in gross assets
Another key condition is the ‘qualifying trade’ requirement. Essentially, your company must be carrying out what HMRC deems a qualifying trade, or preparing to do so (i.e. if you’re yet to start trading).
The good news is that the qualifying trade list is so exhaustive that HMRC has created a list of all the non-qualifying trades, which gives you an idea of just how open the schemes are.
Of course, there are other conditions your company must meet (see here for SEIS eligibility and here for EIS eligibility) but for the most part, if your company meets the criteria above, it’s likely that it’s eligible for at least one of the schemes.
So now you have a clear picture of whether your company is eligible, let’s talk about how SEIS/EIS can be used as an accelerator for business growth.
What can I do with SEIS/EIS investment?
The primary goal of SEIS/EIS is to help businesses ‘grow and develop’ (you’ll notice this phrase appear throughout your application as it’s part of the ‘risk to capital’ condition).
In the application, you’ll be asked what you plan to do with the investment and how it will help your company grow and develop.
HMRC doesn’t define growth and development but instead uses generic indicators to determine whether you meet the condition. In other words, explain what you plan to spend the money on and how, over time, it will increase your company’s:
- Customer base
- Number of employees
Here are a few common examples:
- The company will spend the money on marketing initiatives to increase its customer base and revenue.
- The company will spend the money on hiring X new employees to increase its customer base.
- The company will invest in new technology to increase productivity.
- The company will purchase X new vehicles to increase productivity.
Of course, these are very generic examples. When applying for SEIS/EIS, your business plan and other supporting information should be consistent with, and expand on, your answer to the risk to capital condition.
HMRC also recognises that companies can grow and develop in their own way, so there are no hard and fast rules to this condition.
For instance, a company may want to invest in automated technology which actually reduces employee count but increases productivity. This would be acceptable, so long as the application explains how it will help the company grow.
As you can see, HMRC is relatively flexible with what you can do with the money raised. However, the second part of the risk to capital condition is the ‘risk of loss of capital’ for investors.
The investment made must pose a significant risk of a loss of capital to the investor of an amount greater than the net return.
The ‘grow and development’ condition and ‘risk of loss of capital’ condition somewhat go hand in hand. Using the examples above, investing in marketing or new technology doesn’t necessarily guarantee results.
The campaigns could deliver a negative ROI, and while the new technology increases productivity, there might not be a market to sell the additional products to.
What SEIS/EIS is truly there for is to give businesses a cash injection to spend on the things they need (but don’t have the funds for) to accelerate their growth.
What's so great about SEIS/EIS investment?
As you probably know, it’s incredibly difficult for early-stage businesses to get funding or loans. Then you’re having to fight the tide of repayments just to stay afloat.
SEIS/EIS offer an alternative way to receive funding, with no repayments in the short to medium term. In fact, many SEIS/EIS investors are there for the long term, and the schemes themselves encourage patient capital.
Investors must hold onto their shares for at least three years to retain the tax benefits, but chances are they will hold onto them for much longer as they’re unlikely to see a positive return for over three years.
Bringing on an investor as a long-term partner at such an early stage in your company’s life can open up a number of opportunities too.
You’ll gain invaluable insight and access to their network of investors and business partners, which could lead to more investment or other commercial opportunities.
On top of that, many investors actively look for SEIS/EIS-eligible companies to make use of the generous tax breaks. So once your company is approved for advance assurance, it’s likely that you’ll find investment opportunities significantly easier.
Finally, from an equity perspective, the shares you sell to investors must be non-preferential shares – meaning the investors cannot have more rights to capital than you do in the event of an exit or winding down.
Plus, individual investors cannot hold more than 30% of the shares, so you’re not selling more shares than you’re comfortable with but still unlocking the power of equity to grow your business.
So while it’s apparent that investors get a great deal through SEIS/EIS with the generous tax reliefs, companies themselves also benefit from a significant cash injection to spend on what they need to grow, as well as long-term investor support.
Okay, I’m sold, but the application process is confusing…
We’ll admit the application can be confusing due to the lack of guidance on HMRC's website.
That’s why we've produced a handy guide to help you apply with complete confidence.
When you're ready, head over to HMRC's website to start your advance assurance application and your SEIS/EIS journey!