The UK Government operates multiple schemes to encourage new businesses to be innovative. Some of these schemes grant investors tax breaks for investing in companies considered to have a high degree of risk. Two of these schemes are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). But what really are they, how do they differ and how can you apply?
The Difference Between SEIS and EIS
Although SEIS and EIS have similarities, they also have crucial differences.
SEIS is aimed at investors wanting to back early-stage businesses with investments up to £100,000 per fiscal year. In return, they are granted a 50% tax break. Moreover, investors benefit from CGT exemptions on profits from share sales after three years.
EIS is different. It targets investors wanting to invest as much as £1 million on a medium-sized business. The investor will then qualify for a 30% tax break and also pay no CGT tax from the sale of company shares after three years.
SEIS and EIS are similar in some ways. Shares held in the first two years cannot be subject to inheritance tax, and investors can offset losses on any sold shares through their CGT.
What Companies Qualify for EIS and SEIS?
Most businesses can qualify for SEIS and EIS funding, yet, some trades cannot. Some of the trades that are excluded include:
- Land trading and property development
- Banking and insurance
- Electricity exporting
- Money lending
- Legal services
- Accountancy services
If less than 20% of the business’s activity constitutes an excluded trade, they can still qualify to raise funds. However, multiple tests much be satisfied before becoming eligible for either scheme.
What Does EIS and SEIS Investment Need to be Spent on?
Any investment under these schemes must be spent on developing the business, such as innovations, marketing or recruiting relevant professionals.
What Are the Investor Caps for the SEIS and EIS scheme?
An individual investor must not invest more than £100,000 within a tax year under the SEIS scheme. A single investor cannot invest more than £1 million within a tax year under the EIS scheme. Investors cannot obtain more than 30% of the company’s total shares and must not be a director of the business or an employee in any role.
However, once shares have been issued, the investor is then allowed to take up a board position and become a company director.
Assure Investors with an HMRC Application
Investors enjoy taxation benefits from investing in SEIS and EIS qualifying companies. But before they invest, they are likely to want assurances that your business qualifies for the scheme(s). You can do this by applying to HMRC and generate the advanced assurances often requested by investors.
What Does an HMRC Application Include?
Making a correct and complete application to HMRC will avoid your application being rejected or HMRC requesting further details, resulting in delays (and potentially losing investors).
Your application will need to include details from one of your proposed investors (possibly more than one). They also need a business plan, three-year financial forecasts and the most recent accounts of the business. These are some of the main documents required but there are others, including a cover letter.
If you submit your application correctly, HMRC will usually process it within three weeks. For guidance and help on this application, don’t hesitate to contact Yorkshire Accountancy.
Granting Your Investors Tax Relief
Once you have secured investments during your funding rounds, and you have issued share certificates, you then need to provide investors with their tax relief. Note, the aforementioned tasks must be completed before this is possible.
First you must send a SEIS1 or EIS1 Compliance Statement to HMRC (or both). If HMRC accept the statement and everything has been completed correctly, they will then send you investment reference numbers for each investor. These numbers enable you to generate SEIS3 Certificates or EIS3 Certificates (or both) to each investor, which awards them with the tax relief.
How can you find EIS and SEIS investors?
The best way to find investors who would be interested in your business plan and the tax relief is to get assurance from HMRC first. Most investors of this nature will not consider your company until these assurances can be provided.
For further information on EIS and SEIS, and help with applying, do not hesitate to contact our experienced small business accounting team here at Yorkshire Accountancy.