SEIS & EIS – funding for startups
The Seed Enterprise Investment Scheme and Enterprise Investment Scheme offer powerful tax incentives for investors in small firms.
For startups looking for investment, SEIS and EIS are invaluable tools. SEIS offers investors 50% income tax relief on investments up to £100,000, while EIS offers 30% relief on investments up to £1 million (or £2 million for 'knowledge intensive' firms).
Furthermore, if the shares are held for at least three years, any gain on their sale is generally free from Capital Gains Tax. For the company, obtaining 'advance assurance' from HMRC that they meet the qualifying criteria is a vital step in attracting serious investors and securing the funding needed for growth.
The qualifying criteria for companies
To qualify for SEIS, a company must be unquoted, have fewer than 25 employees, and have gross assets of no more than £200,000. It must also be carrying out a qualifying trade. EIS is available for larger companies, but they must still be unquoted, have fewer than 250 employees, and gross assets of no more than £15 million. Both schemes have strict rules regarding the use of the funds raised, which must be used to promote the growth and development of the trade.
The risk to capital condition
HMRC introduced the 'risk to capital' condition to ensure that SEIS and EIS are used to support genuine entrepreneurial ventures, rather than low-risk capital preservation schemes. To meet this condition, the company must have objectives to grow and develop its trade, and the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including the tax relief). This condition is heavily scrutinised by HMRC during the advance assurance process.
The importance of advance assurance
While advance assurance is not mandatory, it is highly recommended. Most experienced angel investors will not commit funds without it. Advance assurance provides comfort to investors that the company meets the qualifying criteria and that they will be able to claim the tax reliefs. The application process requires a detailed business plan, financial forecasts, and a clear explanation of how the funds will be used.
Disclaimer
The information contained in this article is for general guidance on matters of interest only. It should not be used as a substitute for consultation with professional accounting, tax, legal, or other competent advisers. Before making any decision or taking any action, you should consult a Kingscott Dix professional.