If your startup is fundraising you’ll want to make yourself more investible. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) help you do just that. EIS was the first of the two to be launched with SEIS emerging in 2012. As part of the UK government's ongoing initiative to support SMEs  each scheme was designed to make investment in UK-based businesses attractive. Recognising the difficulties often faced by early-stage companies when it comes to raising the finance needed for growth, these schemes offer generous tax relief to investors who are willing to put their faith and money into these ambitious companies.

It’s therefore unsurprising that many of us have questions over what the differences are between each scheme and the way the process works for each. Investors welcome tax breaks while supporting UK companies at the same time, so if you break through the jargon and are able to convey the differences between each, this ensures credibility during your funding round and keeps your investors happy. 

Let's examine the core differences between the two schemes:

To be eligible, a company must:

  • Trade must be less than 2 years under SEIS or 7 years under EIS
  • Have less than 25 under SEIS or 250 employees for EIS
  • Have no more than £200,000 gross assets or £15m for EIS
SEIS

Unlike the EIS, the SEIS is focused on very early-stage companies and offers significantly greater Income Tax relief of 50% against the amount invested. 

The lifetime cap is £150,000 when investing in SEIS-eligible businesses, investors can expect tax relief benefits up to £100,000 each tax year, the following will apply: 

  • Greater Income Tax relief of 50% against the amount invested. 
  • Capital Gains Tax (CGT) exemption on any gain from the sale of your shares if they have held shares for 3 years
  • CGT write-off of 50% of the investment amount in the same tax year
  • Shares are generally inheritance tax (IHT) free, as long as the shares are held for an initial period of over 2 years
  • If shares are sold at a loss, investors can offset this against CGT or Income Tax
  • The investor can carry back part or all of the investment in the preceding year they invested
EIS

The big brother of the SEIS, the EIS is designed for small and medium-sized businesses and comes with Income Tax relief of 30% against the amount invested.

An investor can invest up to the maximum annual investment of £1m per tax year. An EIS company has a lifetime cap of £12m or £20m if the company is "knowledge intensive" - we've prepared an article which is soon to be released so watch this space. 

Key benefits associated with EIS include: 

  • Investors will be exempt from Capital Gains Tax (CGT) gain made from the sale of their shares, after they have held them for 3 years
  • They can defer up to 100% of their investment amount against any CGT incurred up to 1 year before or 3 years after disposal
  • Shares are generally inheritance tax (IHT) free, as long as the shares are held for an initial period of more than 2 years
  • If the shares are sold at a loss, they can offset this against CGT or Income Tax
  • The investor can carry back part or all of the investment in the preceding year they invested
Tips to note:
  • Investors equity stake can be no higher than 30% in order to qualify for EIS or SEIS tax relief. 
  • It at your discretion which investors receive SEIS and who receives EIS - typically you would raise under SEIS first 
  • You can raise under both SEIS and EIS, however you must not issue shares under both schemes on the same day
  • Make sure you issue the shares after you receive your investment i.e. the money is in the bank first, then issue the shares.  
Other considerations:
  • There is a 4 month or 70% rule for SEIS companies before applying for full SEIS clearance, this means either: 
  • Your startup must have traded for at least 4 months, or 
  • Your startup must have spent 70% of the SEIS investment. 
So, What's an acceptable trade date for tech startups?

Simply paying for developers and incurring costs is ordinarily considered "preparing to trade" rather than trading for SEIS purposes. The trade date for your company could be deemed when you have a beta-version of your platform ready to convert free users into paying subscribers, not only the date your startup raised your first invoice. 

We hope you've found this blog helpful, if so please share this blog and we'll be preparing plenty more articles on SEIS and EIS so keep coming back. Also, check out our latest guide on SEIS and EIS  startup funding for more in-depth advice and recommendations.

If you would like more information on SEIS or EIS please contact us.


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