Do EIS and SEIS schemes attract funding opportunities?

Do EIS and SEIS schemes attract funding opportunities?

Organic growth will only get your business so far, but at some point, you may need additional funding to take up a new opportunity or scale up your operations – and this is when external investment could become a key part of your growth strategy.

One route to secure business funding is via the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS). Both schemes help companies encourage investment and raise funds for growth and for potential investors to make use of some attractive tax incentives.

But how do the SEIS and EIS schemes work? In this blog, we'll cover all you need to know about EIS and SEIS schemes.

What is the Enterprise Investment Scheme (EIS)?

The EIS is designed to help your company raise money to grow your business. It attracts potential investors by offering tax reliefs to investors who subscribe for new shares in your company.

What is a Seed Enterprise Investment Scheme (SEIS)?

The SEIS is designed to help your company raise money when it’s first starting to trade, so unlike the EIS, this scheme is for brand new businesses. It raises money by offering tax reliefs to individual investors who subscribe for new shares in your company.

How do you qualify for EIS and SEIS?

For both schemes, one of the key conditions is that you’re a trading company, not an investment, finance, property dealing or legal company. These schemes are aimed primarily at trading businesses in sectors like manufacturing, retail, fashion or technology etc.

EIS is available to companies that meet the following eligibility criteria:

• A company that is permanently established in the UK.
• Be in a qualifying trade.
• Have fewer than 250 employees.
• Been trading less than seven years.
• Have gross assets of no more than £15 million.
• Combined investment from EIS, VCT, SEIS within a £5 million allowable limit.

SEIS is available to companies that meet the following eligibility criteria:

• A company that is permanently established in the UK.
• Be in a 'new' qualifying trade.
• Have fewer than 25 employees.
• Have been trading less than two years
• Have gross assets of no more than £350,000.
• Must not have previously received investment from EIS or a VCT.

In addition to the above criteria, your company must not have shares publicly traded on a recognised stock exchange during share issuance, must not have more than 50% of its shares owned by another company, or have control over any other company (except for qualifying subsidiaries). Also, your company cannot be part of a partnership for SEIS eligibility.

What are the key steps to include when using EIS or SEIS?

EIS and SEIS are both approval schemes with HMRC. Your key aim at the start is to make an application to HMRC and to get approval.

You can make an ‘advance approval’ to HMRC to speed things up, but there are some key steps you must go through before getting the money.

You’ll need to provide:

• The business plan and financial forecasts.
• A copy of your latest accounts.
• An explanation of how you meet the risk to capital condition.
• Details of all trading and activities to be carried out, and how much you expect to spend on each activity.
• An up-to-date copy of your memorandum and articles of association.
• The information memorandum, prospectus or other document used to explain the fundraising proposal to your investors.
• Details of any other agreements between your company and the shareholder.
• A list of the amounts, dates and venture capital schemes under which you’ve previously received investment.
• Any other documents to show you meet the qualifying conditions.

HMRC will usually give you a response within a week, if there’s nothing problematic in the application, allowing you to start issuing certificates to investors quickly.

How do I apply for EIS and SEIS schemes?

Applying for the EIS or SEIS does involve a certain amount of paperwork. It’s advisable to work with someone who’s been through the process and knows the potential pitfalls. Haines Watts can offer you all the advice and help you need to prepare an application, so contact us at our offices in Wirral, Chester or Liverpool

The EIS and SEIS rules have been tightened in recent years to crack down on perceived misuse. For example, the risk to capital condition must be satisfied if you’re going to get HMRC approval (see below).

Before starting the process, you need to verify your company's eligibility for the scheme, determine the amount of funding you need and the percentage of your business you're willing to sell.

Advance assurance

We highly recommended that businesses apply for advance assurance before looking for or approaching investors. This process allows you to assess if your investment proposal meets the necessary conditions before contacting potential investors.

While an advance assurance application isn’t mandatory for many transactions, investors are likely to take you more seriously if you can demonstrate advance assurance before going to the market. Some investors will only invest if you have obtained advance assurance.

Getting your application, and all the associated financials up to date is vital – you don’t want your application to be turned down at the first hurdle. You need to address all the key points in your covering letter, including considerations like the risk to capital condition.

Capital condition

The risk to capital condition is a key aspect of the process for both EIS and SEIS and is based on the following two stages:

1. Your business must demonstrate a clear objective for growth and development resulting from the money raised. Factors that HMRC consider appropriate are things like increases in turnover, employee numbers and customer base, as well as investments in infrastructure and projects.
2. There must not be a significant risk to the investor's capital and the company's finances. This ensures that the investment is geared towards long-term growth and development rather than short-term gains.

With capital condition, you need to be ambitious, but you also need to demonstrate how the business will work and think very hard about how you’ll present the business idea and your vision for the company.

Create an investment memorandum that sets out a very clear case for why investors would want to invest in the business – that’s your ‘sales brochure’, in many respects and should sell the vision, mission and viability of the business.

Create a comprehensive business plan that outlines your goals, objectives and financial projections. If you already have a plan, you may want to review and revise it to suit the conditions of this sort of investment.

Ensure you have a Private Placement Memorandum (PPM) that meets all regulatory requirements. A private placement memorandum (PPM) is a legal document provided to prospective investors when selling stock or another security in a business. It is sometimes referred to as an offering memorandum or offering document.

How long does the application take?

HMRC state on average an 8-12 week turnaround for a response to an application, so build this into your planning and investment timeframe.

How can my business use the money it raises from SEIS and EIS?

Once you've secured funding the money must be used for qualifying business activities that promote growth and development. This could be:

• Expenses that help to grow your company, like hiring new employees, purchasing new equipment or marketing your business. 
• Research and development that’s going to help you grow your company in the future, like developing a new product or researching ways to improve an existing one.

You need to spend EIS funds within 2 years and SEIS funding within 3 years or receiving the investment.

What are the benefits of EIS and SEIS for investors?

How will these benefits attract investment?

Income tax relief

The key value of SEIS and EIS for potential investors is the tax relief they can claim on this investment. Investors can claim 50% income tax relief via the SEIS scheme and 30% via the EIS scheme, making the schemes an attractive way to invest money. Getting tax relief at the point of investment is also a real benefit and incentive for many investors.

Tax-free sales of shares

If investors hold the company shares for 3 years or more, the company does well and they then sell up, any gain they make is then also exempt from capital gains tax (CGT). This is in addition to CGT reliefs on the ‘way in’ where disposals of other assets have been reinvested in SEIS or EIS shares.

Capital Gains Tax deferral

SEIS and EIS shares are exempt from capital gains tax (CGT).

If investors have realised a taxable gain (for example by selling a property or investments) and they decide to invest that gain in an EIS-qualifying investment, they can defer the capital gain for as long as the money stays invested, and the EIS conditions are not breached.

Investors can defer gains of any size, made up to three years before and one year after the EIS investment. They can defer a gain even if they have already paid the tax. Once investors get their money out, the gain comes back into charge, and you pay CGT at the current rate. Alternatively, they can invest into another EIS and defer the gain once more. 

If the shares are sold at a loss, the loss (after the income tax relief already given) can usually be set against income tax.

Limits and pitfalls of the schemes

Under SEIS you can only raise £150,000 under the scheme. This scheme is ideal for investing smaller amounts in new enterprises that are just getting off the ground. Each investor can only have a 30% interest in the business, too, so the investor can’t buy 51% of the shares and gain a controlling interest.

There is no limit on the number of investors but there is a limit on how much can be raised by the company annually, which is £5m (and a lifetime limit of £12m) though both limits are for the total of all venture capital schemes. The limits for Knowledge Intensive Companies (broadly ones involved with R&D or developing Intellectual Property) are £10m per year and £20m lifetime respectively.

There are a number of pitfalls post-investment to be aware of too such as loans to investors and the impact of employee shares on the investors’ shares that need to be considered too. Care also needs to be given to the type of shares issued to investors if they are to be of a different class to the founder shares.

Summary

EIS and SEIS are UK venture capital schemes that enable businesses to secure growth funding while offering attractive tax benefits to investors. 

The Enterprise Investment Scheme is tailored to larger, well-established businesses looking for support in expanding operations. The Seed Enterprise Investment Scheme is for smaller, early-stage businesses who need to raise capital to get started.

By qualifying for the EIS or SEIS schemes, businesses can benefit from attracting investors who are keen to support their development while receiving tax relief. These schemes are particularly helpful for businesses that may face difficulties securing funding through traditional methods such as bank loans.

Let Haines Watts guide you through the process

If you need more money to run your business, then EIS and SEIS should definitely be on your radar. These schemes are so beneficial, and you can set them up in a matter of weeks, if everything is handled properly. There’s no downside to speak of and it will help your business to grow. You’re not relying just on organic growth and raising external funding is the best way to grasp new opportunities and get your business off the ground.

When it comes to making use of EIS or SEIS, the earlier you talk to your advisers the better. The timing of an application and the funds you require are things you must consider. The legislation is very prescriptive, and if you do things a little late, or a little too early, it can cause investors to miss out on the relief. So, if you are considering either scheme, contact us as soon as you know you need to raise investment.

We guide business owners through the whole EIS and SEIS application process and can advise you every step of the way to help you gain the funding your company requires. Our process is as follows:

1. Review of the business's current financial position.
2. Discuss with you what the business needs in the short and long term and where this investment application will fit into the wider business plan.
3. Review the funding options available based on business needs and current financial position.
4. Ensure that your business is compliant and meets the qualifying criteria.
5. Support you throughout the application process including all the required paperwork and seeking advanced approval.

For more help and advice,  contact us at our offices in Contact our team today in Wirral, Chester or Liverpool.