What are the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS)?

What is SEIS?

Included in the government’s 2012 Finance Bill and launched on April 6 2012, the Seed Enterprise Investment Scheme (SEIS) is intended to encourage investment in early-stage start-ups and small businesses seeking to raise equity finance.

While similar to the Enterprise investment Scheme (EIS), SEIS is focused on encouraging investments solely in small, young companies. Like the EIS, the incentive to investors comes in the form of income tax relief and an exemption from capital gains tax (CGT). As explained below:

SEIS tax relief – How it works

Under the SEIS, investors can receive income tax relief worth up to 50% of investments of up to £100,000 per annum and this SEIS relief can be claimed up to five years after the 31st January in the year the investor makes the investment.

Therefore, the SEIS offers an attractive – and generous – incentive for angel investors to back start-ups and small firms. If the £100,000 limit is not utilised, any surplus may be carried back to the previous year.

Shares in a company must be held by the investor for a period of three years, from date of issue, for the tax relief to be retained. If the investor is disposed of within that three year period or, if any of the qualifying conditions cease to be met during that period, relief will be withdrawn or reduced.

Alongside this income tax relief, Capital Gains Tax (CGT) exemption is also available on gains on shares made via SEIS; giving investors a further tax break worth up to 28% of their gain.

What businesses are eligible for SEIS funding?

The business receiving the investment must be:

• UK-based and a limited company
• The founder must be a UK resident
• The company must not sell shares on a recognised stock exchange, such as AIM or FTSE
• The business must also have 25 or fewer employees
• It must have gross assets of £200,000 or less
• The recipient must also be a new business (or preparing to start a new business) which is two years old or less
• The recipient company can only obtain £150,000 of funding through the SEIS. This is a cumulative limit, not an annual limit
• And finally, the business must not have previously raised money under the EIS or venture capital trust (VCT) schemes.

Who can invest via SEIS?

The investor cannot be an employee of the company (unless they are a director of the company), nor have more than a 30% interest.

The investor cannot receive any ‘value’ from the company during the three-year qualifying period. However, this does not include receipt of ‘ordinary commercial payments’ such as dividends or reimbursements of expenses if the investor is a director.

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What is the Enterprise Investment Scheme?

The Enterprise investment Scheme (EIS) incentivises wealthy people to invest in more advanced companies than SEIS by offering tax breaks.

Since the EIS was launched in 1993, more than 27,000 companies have received investment, while over £18bn in funds have been raised.  The majority (56%) has been put into companies raising EIS funding for the first time.

How EIS works

You can raise up to £5m each year from individual investors, and a maximum of up to £12m over the lifetime of your business. This includes any finance received from other venture capital schemes.

Investment made through EIS is intended for companies at the early stages of development, with relatively low levels of staff and assets. Your investors can claim and keep EIS tax reliefs relating to their shares.

The investment can be used for qualifying business activity, including:

• A qualifying trade (follow the link to find out what qualifies)
• Preparing to carry out a qualifying trade (which must start within 2 years of the investment)
• Research and development that’s expected to lead to a qualifying trade

Is my business eligible for EIS?

Your company is eligible to use the scheme if:

• It has a permanent establishment in the UK
• It is not trading on a recognised stock exchange (such as the London Stock Exchange) at the time of the share issue, and does not plan to do so
• It does not control another company other than qualifying subsidiaries
• It is not controlled by another company, or does not have more than 50% of its shares owned by another company
• It does not expect to close after completing a project or series of projects
• Fewer than seven years have passed since your company’s first commercial sale