Birketts’ Tax specialists answer your questions regarding SEIS and EIS.
What is SEIS?
The Seed Enterprise Investment Scheme (SEIS) offers attractive tax incentives to investors investing in new shares in qualifying start-up companies. The aim is to encourage investment in riskier business ventures. The SEIS tax benefits include:
- an investor can reduce their liability to income tax by 50% of the sums invested in SEIS qualifying shares up to an annual investment limit per investor (currently £100k)
- provided that the investor has successfully reduced their income tax liability using SEIS relief, any gains arising on the sale of the SEIS qualifying shares should be exempt from capital gains tax provided that the shares have been held for at least three years
- it may be possible for an investor to benefit from a full or partial deferral of capital gains tax on gains arising on the disposal of assets where a qualifying investment in SEIS qualifying shares is made within specified times scales. As this works as a deferral rather than as a full exemption from tax, the deferred gain will, in broad terms, come back into charge on sale of the SEIS qualifying shares. There are limits on the maximum gain that can benefit from the deferral (currently £100k).
What is EIS?
The Enterprise Investment Scheme (EIS) offers attractive tax incentives. The type of company that is able to issue EIS qualifying shares to investors is much wider than under SEIS and the tax incentives are not as attractive to reflect the reduced risk of investment. The EIS tax benefits include:
- an investor can reduce their liability to income tax by 30% of the sums invested in EIS qualifying shares up to an annual investment limit per investor (currently £2m but any investment over £1m must be invested in ‘knowledge-intensive’ companies)
- provided that the investor has successfully reduced their income tax liability using EIS relief, any gains arising on the sale of the EIS qualifying shares should be exempt from capital gains tax provided that the shares have been held for at least three years
- it may be possible for an investor to benefit from an unlimited deferral of capital gains tax on gains arising on the disposal of assets where a qualifying investment in EIS qualifying shares is made within specified times scales. As this works as a deferral rather than as a full exemption from tax, the deferred gain will, in broad terms, come back into charge on sale of the EIS qualifying shares.
How much money can be raised under SEIS?
A company can raise up to £150k under the SEIS scheme.
How much money can be raised under EIS?
A company can raise up to £5m annually from investments that qualify for SEIS, EIS and Social Investment Tax Relief, although this figure rises to £10m for ‘knowledge-intensive’ companies. There is also a lifetime limit on the amount a company can raise from investments qualifying for SEIS, EIS and Social Investment Tax Relief. This is currently set at £12m and, for ‘knowledge-intensive’ companies, £20m.
Can an investor have a substantial interest in the company under the SEIS or EIS schemes?
For both SEIS and EIS, an investor cannot hold in excess of 30% of the ordinary share capital, 30% of the issued share capital or benefit from more than 30% of the voting rights in the relevant company. When calculating the position you must aggregate the holding of all associates. For these purposes, the term ‘associates’ includes business partners, trustees of any trust of which the investor is a settlor or beneficiary, and relatives. Relatives includes spouses and civil partners, parents, children and other lineal ascendants and descendants. The term does not include brothers and sisters.
Who can issue SEIS and/or EIS qualifying shares?
In broad terms, a UK trading company or an overseas company with a permanent establishment in the UK may be able to issue SEIS and/or EIS qualifying shares. However, not all trading companies can qualify and certain types of business are specifically excluded from both reliefs. For example, a company cannot attract SEIS or EIS investment if a substantial part of its trade consists of property development, farming or financial activities (and there are other excluded activities too).
There are also maximum age limits for both SEIS and EIS. For example, a company seeking to issue SEIS qualifying shares, must have commenced its trade less than two years before the SEIS were issued. Furthermore, it (or its 51% qualifying subsidiary) must not have carried on another trade.
A company seeking to issue EIS qualifying shares must issue those shares within seven years of the first commercial sale or, if the company is a knowledge-intensive company, ten years from the date of first commercial sale or, if the company chooses, the date from which the annual turnover of the company exceeds £200k. EIS qualifying shares may also be issued outside of this time period if one of three alternative conditions is satisfied and the company in question has raised cash previously under SEIS, EIS or the Venture Capital Scheme. Please contact the Birketts’ Tax team to discuss whether these alternative conditions may be satisfied.
Can you obtain a clearance from HMRC that your company qualifies?
You can seek advance assurance from HMRC, which confirms that your company satisfies the requirements at the time of the investment. However, such advance assurance is only as good as the information provided to HMRC and only relates to the shares being issued at that time. It is therefore highly recommended that full information is provided to HMRC within the advance assurance application. It is good practice to seek further advance assurances for each share issue and, if the situation changes between obtaining the advance assurance and the share issue (for example if the articles of association of the company alter), to communicate such changes to HMRC and seek an updated advance assurance.
An advance assurance only relates to the company conditions and does not confirm whether or not an individual investor can benefit from the scheme.
What is a ‘knowledge-intensive’ company?
A company is treated as ‘knowledge intensive’ if it meets (at the time of the relevant investment):
- at least one of the operating costs conditions; and
- either the innovation condition or the skilled employee condition.
Operating costs conditions
If your company has existed for three years or more before the EIS investment, it must have incurred either (a) at least 15% of its operating costs - in at least one of the relevant preceding three years - on research and development or innovation (R&D Expenditure) or (b) at least 10% of its operating costs – in each of the relevant preceding three years - on R&D Expenditure. For these purposes, intra-group costs are not included as operating costs.
If a company has not existed for three years or more, the conditions set out above apply for the three years following the investment instead.
The ‘relevant three preceding years’ are, generally, the three years ending with the company’s last filed accounts.
The issuing company must show that, at the time the shares are issued, it has created (or is creating, or is preparing to create) intellectual property and it is reasonable to assume that, within 10 years of the share issue, a greater part of the issuing company's (or group's) business will derive from the exploitation or use of that intellectual property. The company (or group) must create the majority of value of the intellectual property and the company (or group) must have the right to exploit it (whether jointly or alone).
Skilled employee condition
At least 20% of the workforce must hold a higher education qualification and be engaged directly in research and development carried on by the issuing company.
The above condition must continue to be met throughout the three years following the EIS share issue.
Birketts SEIS and EIS Checker
Birketts has designed a SEIS and EIS Checker to help you decide whether your company may be able to qualify for SEIS and/or EIS investment.
Find out more about the Checker or access the SEIS and EIS Checker here. NB the app is best viewed via a desktop.