EIS and SEIS are two similar schemes but have some important differences.
And some founders and investors aren’t aware of these differences, which can be confusing when choosing which scheme to apply.
This guide aims to differentiate SEIS and EIS and show startup founders and investors which scheme they should consider getting.
→ Download Now: Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) Guide
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme or EIS, is a well-known aspect of the UK tax environment for investors, having been launched by the UK government in 1994. EIS offers considerable tax benefits to investors who fund high-risk, early-stage businesses.
EIS is designed for medium-sized businesses. Its goal is to help startups that have already built the groundwork and are eager to scale their operations.
You can make use of the EIS scheme in order to:
- Each tax year, you can invest up to £1 million.
- In exchange, you’ll get a 30% tax return.
- After three years, there are no capital gains taxes to pay.
EIS allows your company to raise a maximum of £5 million every year and a total of £12 million throughout your company’s lifetime.
Amounts received from other venture capital schemes are also included. In addition, your company must receive venture capital funding within seven years of its first commercial sale.
And according to GOV.UK, since its launch, 32,965 companies have received funding, with around £24 billion of funds raised.
And if you’re interested in investing in EIS, you can do so in one of two ways: directly in a single EIS-qualifying company or through a fund manager who will put together a portfolio for you. Both strategies may have a place in a seasoned investor’s portfolio.
Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme or SEIS was first introduced by HM Revenue & Customs (HMRC) in April 2012. It focuses on early-stage companies, emphasising startups at the very early stage of their growth by offering several tax reliefs on investments made into qualified companies by individual investors.
SEIS will help you collect the funds you need to expand by providing significant tax benefits to investors when your startup is in its early stage, making a future investment in your company more appealing.
With the SEIS scheme, an individual investor may:
- Invest up to £100,000 per tax year
- Receive a 50% tax break in exchange for the investment
- Avoid any Capital Gains Tax on profits
- Obtain a Capital Gains Tax relief when reinvesting gains from an initial SEIS-qualifying company investment.
SEIS funding allows a company to raise a maximum of £150,000. Furthermore, because SEIS is riskier than EIS, your capital gains aren’t deferred, allowing you to halve the capital gains tax you owe.
Since SEIS was launched in 2012 to 2013, 13,800 individual companies have received investment through the scheme, with £1.4 billion of investment raised.
What’s The Difference Between These Two?
EIS and SEIS’s aim has always been to provide a channel for early-stage investments and become high-growth potentials.
And although EIS and SEIS are similar in several ways, the main difference is that the conditions for startups interested in participating in either EIS or SEIS are different.
SEIS is aimed at startups and very early-stage companies. On the other hand, EIS may be used for more extensive and older businesses (although these are still considered small and young in the UK industry and corporate landscapes).
Also, the maximum age of the trade when the first round of SEIS funding is raised is two years, while EIS is seven years.
With EIS, you may have up to £15 million in gross assets before the investment and have up to 250 employees. With SEIS, you may also have up to £200,000 or less in gross assets before the investment, and you may only have up to 25 employees.
What Companies Qualify For Each Scheme
The following requirements must be fulfilled for a company to be deemed EIS eligible:
- The company has a permanent establishment in the UK.
- The company is not listed on a recognised stock exchange or intends to be listed when issuing shares.
- The company has no control over another company except for qualified subsidiaries.
- No other company may own the qualifying company or own 50% or more of its shares.
- The qualifying company, as well as any of its subsidiaries, has no gross assets worth more than £15 million before any shares are issued and not more than £16 million after
- The corporation must have less than 250 full-time employees when the shares are issued.
The following requirements must be fulfilled for a company to be deemed SEIS eligible:
- The company has a permanent establishment in the UK.
- The company must have under £200,000 in gross assets pre-money.
- The company must have no more than 25 employees.
- The company must have been trading for less than two years. Note that the date a company starts trading differs from the date of incorporation detailed on Companies House. HMRC would examine the company’s profit and loss accounts rather than the incorporation date when determining whether this test has been met.
- The company must not be a member of a partnership with another company, as HMRC will flag this.
Companies not qualified for the SEIS and EIS schemes
Your company would be ineligible for the scheme if these excluded trades account for more than 20% of its regular operations.
The following activities listed below are examples of those that are not permitted:
- Production of coal or steel
- Farming or market gardening
- Energy generation
- Exporting electricity
- Leasing or property development
- Managing hotels or nursing homes
- Dealing in futures or securities
- Legal or financial services (banking and insurance)
- Offering services to a non-qualifying company
If your company qualifies for the schemes, the investment must be used to qualify business activity at all times. This means using the funds to promote the company’s growth and development. This includes hiring new employees or marketing the product or service.
Criteria For Investors To Be Eligible For The Schemes
To be eligible for SEIS as an investor, you must meet the following criteria:
- You must be a UK taxpayer.
- You can invest up to £100,000 each tax year.
- You can’t work for the company, but you can work as a paid director.
- You must also hold more than 30% of the company’s total shares.
To be eligible for EIS as an investor, you must meet the following criteria:
- Your interest in the company must be less than 30%.
- You must not be a business employee, partner, or paid director of the company.
- Your partners or associates do not have any interests in the company (this includes your spouse, relatives or previous business contacts)
- You don’t have any preferential shares of any kind.
- You don’t have any form of controlling interest in the company.
- You aren’t using the scheme for tax avoidance.
The rule disqualifying related persons working in the business has one exception. Given their positions as directors of the corporation, this exemption helps to promote participation from business angels in the scheme.
Even if compensated for their services, business angels could be liable for tax relief if the angel director was not related to the company when the shares were released.
However, since the rules for business angels are strict, it’s best to seek HMRC advice.
Choosing The Right Scheme For Your Startup
Identify the needs of your company.
Assess which investment scheme offers more help to your business.
Because of the substantial tax relief granted to investors under EIS and SEIS, every individual investor’s amount is capped. This helps if your company is in the early stage of giving away too much power to a single person too early in its development.
With EIS, each investor can invest up to £100,000 per tax year, and with SEIS, each investor can invest up to £1 million per tax year.
Find out which investment scheme best supports your company.
Although there are similarities to both the SEIS and EIS schemes, the big difference for startup owners is the company the schemes aim for.
Find out which scheme supports your starting company and which can be used at a later stage of your startup.
If your startup is in its early stage and needs a boost, SEIS is suited for you, while EIS can be used later.
Both EIS and SEIS are great schemes for early-stage companies and are excellent ways of attracting investors.
However, learn to choose a suitable scheme for your startup and qualify for that scheme.
I hope this guide helped you identify which scheme is right for your business.
If you have any questions regarding EIS and SEIS, you can call us.
Rest assured that we will help you in answering all your questions.
Originally published April 19, 2021, 08:08: AM, updated March 21, 2022