"What Exactly Is SEIS and EIS Tax Relief?"
Some questions in life are more fundamental than others and some are more specific or technical, and so it is in the world of early stage businesses. But for the person asking the question, each carries the same weight, and each is of the same importance because at the time of asking it is that point that is not understood.
One of the more technical and specific questions that I often overhear is ‘what exactly is SEIS and EIS Tax Relief?’ and I am also often asked the next stage of that question which asks for much more detail about how they work.
For the founders of many early stage business starting to think about raising funds, the very first thing that they are told to do by someone is to make sure that the company is SEIS or EIS approved, but in many cases they are left wondering what exactly that is and what the benefits are.
SEIS stands for Seed Enterprise Investment Scheme and EIS stands for Enterprise Investment Scheme and both are tax relief schemes created by the UK Government to encourage investment from individuals into UK registered startups and early stage businesses. Essentially, they both operate in the same way although SEIS is more advantageous but has greater restrictions than EIS.
The majority of UK registered startup companies qualify although there are some restrictions on sectors or activities such as farming or running a hotel. The business must also be under a certain age and size and with a limited number of employees. It is the business that applies to HMRC for ‘Advanced Assurance’ that when they start to raise funding that investment into the business will qualify, but as the tax relief is claimed by the individual investor it depends on the individuals own personal circumstances. In order to qualify the investor mut pay tax in the UK and the scheme is not open to founders although they can claim tax relief in other ways.
What exactly is the difference between SEIS and EIS?
SEIS
Maximum inward investment eligible - £150,000
Period from first commercial sale to investment - <2 years
Company maximum gross assets when shares issued - <£200,000
Maximum number of staff - <25
Tax relief on investment for the investor - Can claim 50% of investment made
Tax relief for the investor on any losses made - Yes, at highest rate tax paid for net investment
EIS
Maximum inward investment eligible - £12,000,000
Period from first commercial sale to investment - <7 years
Company maximum gross assets when shares issued - <£15,000,000
Maximum number of staff - <250
Tax relief on investment for the investor - Can claim 30% of investment made
Tax relief for the investor on any losses made - Yes, at highest rate tax paid for net investment
Under both schemes all income and capital gains are exempt from tax as well as any shareholding being exempt from inheritance tax.
As can be imagined, there are many intricate details to these schemes and this article is not intended to cover all of those intricacies, but rather to offer a relatively straight forward answer to an important question for founders. For those wanting to know the full details then the HMRC website should be visited.
So, SEIS and EIS are tax relief schemes made available to individuals paying tax in the UK and investing in early stage UK registered businesses. Both schemes have substantial benefits to the individuals investing by way of tax refunds on investments made as well on any losses made, thereby reducing both the initial investment and the investment risks. If your business has qualified for SEIS or EIS then any investment will have much more appeal and to a much wider audience, whether it is to individuals via crowdfunding or more professional business angel investors, thereby making raising investment that bit easier.
