The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are UK government schemes designed to help smaller trading companies raise finance, by offering attractive tax reliefs to investors who subscribe for new shares in these companies.
The SEIS is for initial stage start up and smaller businesses and the EIS is for slightly larger, scale up businesses that need further investment to prosper. In order for new shares to qualify for EIS or SEIS benefits, a number of conditions must be met in relation to the company, the shares and also the investor.
Whether you are a company pitching for funding or an investor wishing to access the tax reliefs available and want to know more about what investments qualify, this article summarises the main conditions to get you started.
EIS and SEIS tax benefits for investors
SEIS tax benefits
Individuals who invest up to £100,000 a tax year in new shares in SEIS-qualifying companies can claim the following tax reliefs:
- relief against UK income tax at 50% of the amount invested (or the income tax liability, if lower); and
- relief from UK capital gains tax (CGT) on any profit made on a disposal of the SEIS shares provided that the shares are held for a period of at least three years starting from the date of the investment (or the date the company begins trade, if later) and can also write off up to 50% of an existing CGT liability on other assets.
EIS tax benefits
Individuals who invest up to £1 million in a tax year in new shares in EIS-qualifying companies can claim the following tax reliefs:
- relief against UK income tax at 30% of the amount invested (or the income tax liability, if lower); and
- relief from UK capital gains tax (CGT) on any profit made on a disposal of the EIS shares provided that the shares are held for a period of at least three years starting from the date of the investment (or the date the company begins trade, if later); and can also defer CGT on gains made on other assets until the EIS investment is sold.
(The annual investment limit is increased to £2 million in a tax year in the case of investments into "knowledge-intensive" companies which allocate a specific portion of their financial resources to research and development and are principally concerned with the creation of intellectual property and/or 20% of the company's workforce are research and development specialists.)
EIS and SEIS qualifying companies
In order for the individual to access the tax reliefs, the company must meet a number of conditions, including:
| Key characteristics of company issuing the shares – January 2020 |
EIS | SEIS |
|---|---|---|
Not listed |
The company must be unquoted, meaning the company's shares must not be listed. |
|
| Carry on a qualifying trade |
The company must carry on a qualifying trade from the date of issue of the shares (or be preparing to carry on such a trade or for research and development intended to benefit such a trade) and for a period of three years afterwards. Most trades qualify, except for trades such as investment activities. |
|
| Time limit on use of money raised |
the money raised through the share subscription must be used for the qualifying trading activity (including preparations for trade or for research and development intended to benefit such a trade) within two years |
the money raised through the share subscription must be used for the qualifying trading activity (including preparations for trade or for research and development intended to benefit such a trade) within three years |
| Not controlled by another company |
The company must not be 51% subsidiary of another company or under the control of another company. |
|
| Qualifying business activity |
Shares must be issued in order to raise money for the purpose of a qualifying business activity, which is to be carried on by the issuing company. The majority of businesses will be qualifying. |
|
| Permanent UK establishment |
The company must be a UK permanent establishment from the date of issue to three years later. |
|
| Number of employees | The company must have fewer than 250 employees at the time of investment (or fewer than 500 for a ‘knowledge intensive’ company). | The company must have fewer than 25 employees at the time of investment. |
| Gross assets test | The gross assets of the company must not exceed £15 million immediately before the shares are issued and £16 million immediately afterwards. |
The gross assets of the company must not exceed £200,000 immediately before the shares are issued. |
| Maximum age limit | Shares must be issued in the initial investing period. The initial investing period is seven years from the date of first commercial sale (being the company's first sale in a commercial setting of their product or service) or, if the issuing company is a knowledge-intensive company at the issue date, 10 years from the date of first commercial sale. |
The company must carry on a ‘new qualifying trade’, being one which has not been carried on by either the company or by any other person for longer than two years at the date of issue of the shares. |
| Company limits | £5 million annual risk finance limit (or £10 million for knowledge-intensive companies) and a £12million lifetime limit (or £20 million for knowledge-intensive companies). |
No more than £150,000 can be raised through SEIS. |
Additionally:
- the investor (and associates) must not hold more than 30% of the capital of the company or otherwise control it or be connected to it
- the shares must be non-redeemable ordinary shares with no preference to income or on a winding up
- the company must meet the risk to capital condition
- the investment must be made for genuine commercial reasons and not for tax avoidance purposes; and
- the company will need to apply to HM Revenue & Customs for clearance that it is an EIS or SEIS qualifying company.
Whether you are a company looking for new investment or an investor wishing to access the tax reliefs available, please contact the Trowers’ team for more information. We have also produced a series of fact sheets to help you, so click here to access our online resources.
