Both EIS and SEIS are great schemes, but understanding them is not for the faint-hearted. I have spent many an unhappy hour trawling through over 100 sections of the Income Tax Act (ITA) 2007 to answer a question about their intricate details and processes. Not because I’m into tax, or because it’s part of my job but because I’m fund raising for my startup and you’re missing a trick if you don’t, as most savvy investors won’t consider you if your company doesn’t qualify. The fruits of my labour mean that my startup, TableCrowd, does tick all the boxes for EIS (hoorah!) but not SEIS (boo!).
To save you some pain, I’ve put together some FAQs to include some of the questions I have had to answer on this subject matter over the last few years.
1. What is EIS and SEIS?
EIS and SEIS are tax relief schemes designed to encourage investment into early stage, high-risk businesses. They offer a range of generous income tax and capital gains tax reliefs for investors. You can’t raise money under SEIS if you have already raised money under EIS (which is why TableCrowd can’t raise under SEIS), but vice versa is fine.
2. Does my company qualify? What are the basics?
To qualify, your company must:
- Be unquoted;
- Employ less than 250 people;
- Have assets of less than £15m pre issue; and
Carry on a ‘qualifying trade’. This includes most things conducted on a commercial basis with a view to the realisation of profits. It is worth checking the exceptions, which include for example investment and financial activities, just in case.
Note that if your company has a subsidiary, or is a subsidiary, there are separate rules relating to that you should check.
3. How much can you raise under the schemes?
You can raise £5m collectively under the schemes in any 12 month period but only £150k of that can be raised under SEIS.
An individual investor can invest £100k per year under SEIS versus £1m per year under EIS. These differing caps are due to the tax reliefs under SEIS being more generous than under EIS.
4. What should the money raised be used for?
It should be used for:
- A ‘qualifying trade’;
- Preparing to carry out a ‘qualifying trade’; or
- Research and development intended to lead to carrying on a ‘qualifying trade’.
There are separate rules relating to using the money to acquire shares in another company, which you should check out if this is your plan.
5. Where should you use the money raised?
If you raised the money before 6 April 2011, you should use it ‘wholly or mainly’ in the UK.
6. When should you use the money raised?
It should be used within two years of the share issue date or within two years of the date you started trading (whichever is latest). Spending money raised is normally less of an issue than raising it(!), but failure to do so can mean the investment won’t qualify.
7. Do all shares qualify?
The short answer is no. A couple of key rules on this:
Shares must be fully paid up at the time of issue. Make sure you don’t issue the share on the basis of a future promise of cash.
Shares must be full-risk ordinary shares. This basically means that they should not be preference shares or give any special rights to the investor if the company was wound up. The investor should face all the usual risks of making an investment without any protections.
8. Do all investors qualify?
Not necessarily, a few key pointers:
If an investor holds more than 30% of the share capital or voting rights then they won’t qualify. And stakes of associates (which include business partners and some relatives) are taken into account when doing the maths. Often when the company is formed one share is issued to the founder, which results in that person holding 100% of the issued capital until the first proper share issue. HMRC has advised me that this isn’t necessarily counted against that person under the 30% rule.
If you are a director or employee of the company you won’t qualify, and again the ‘associate rule’ comes into play here. I’ve been advised by HMRC that where the shares are issued before the person is appointed as director and where that person is taking a modest fee for their services, that this won’t necessarily see them fall foul of this rule.
If the investor has ‘received value’ from the company, for example a loan or other benefit, their relief might be reduced or withdrawn.
9. Does my company need to apply for the scheme(s) to qualify?
No, you don’t need to apply in advance, but you can apply for an advance assurance from HMRC. The benefits of doing so are, 1) that you can make sure you have done everything correctly if you are new to the game and, 2) it is a helpful piece of paper to show to investors. In order to claim the relief once the shares have been issued, you need to submit some paperwork to HMRC. The company needs to have been trading for 4 months before you do this.
10. I’ve got an advance assurance! Is that it?
No, sadly not, the advance assurance is date stamped and shows that your company qualifies at that time. You need to ensure continued compliance for three years in the case of many of the rules, or the reliefs can be withdrawn or not given – and there are many pitfalls lurking about to catch you out. It is important to remain within compliance, particularly where investors have handed over their cash on the expectation of being eligible for the tax relief.
I’m happy to talk to anyone about the rules. I’m never too far from Google Campus if you’d like to grab a coffee and talk tax!