What is SEIS and EIS?
SEIS and EIS are government schemes giving investors tax relief for investing in early-stage companies. SEIS offers 50% relief up to £200,000; EIS offers 30% relief up to £1 million.
Detailed Explanation
Seed Enterprise Investment Scheme (SEIS)
Investor benefits
- 50% Income Tax relief on investments up to £200,000/year - CGT exemption on SEIS gains after 3 years - CGT reinvestment relief (50% of gain reinvested is exempt) - Loss relief if company fails
Company requirements
- Fewer than 25 employees - Gross assets under £350,000 - Less than 3 years old - Lifetime limit of £250,000 raised via SEIS - Qualifying trade (most are, but not property/finance)
Enterprise Investment Scheme (EIS)
Investor benefits
- 30% Income Tax relief on investments up to £1m/year (£2m if investing in knowledge-intensive companies) - CGT exemption after 3 years - CGT deferral (defer existing gains by investing) - Loss relief
Company requirements
- Fewer than 250 employees (500 for knowledge-intensive) - Gross assets under £15m before investment - Less than 7 years old (or 10 for knowledge-intensive) - Raising under £5m per year (£10m for knowledge-intensive) - Qualifying trade
For your company
- Apply for Advance Assurance from HMRC - Ensures investors can claim relief - Makes fundraising easier - Must spend money on qualifying activities
Process
1. Apply for Advance Assurance 2. Issue shares to investors 3. Submit compliance statement to HMRC 4. HMRC issues EIS3/SEIS3 certificates 5. Investors claim relief on tax returns
Source: HMRC SEIS/EIS Guidance
Real-World Examples
Early-Stage Tech Startup
Your software company, founded 18 months ago, needs £150,000 to scale up your marketing. By utilising SEIS, you can attract investors who will receive a £75,000 income tax rebate (50% of £150,000) and potential Capital Gains Tax benefits, making your funding round more attractive.
Expanding a Craft Brewery
Your craft brewery, in its second year of operation, requires £500,000 to expand production capacity and open a new taproom. By offering EIS shares, investors receive 30% income tax relief (£150,000 on a £500,000 investment) and deferrals of Capital Gains Tax, enticing them to support your expansion plans.
Funding a Social Enterprise
You're launching a social enterprise focused on renewable energy solutions and need £80,000 of SEIS funding. This will allow you to access a wider investor pool due to the 50% tax relief, attracting individuals and smaller funds interested in socially responsible investments.
Common Mistakes to Avoid
- Failing to obtain advance assurance from HMRC before issuing SEIS or EIS shares, which can result in investors being denied tax relief.
- Not keeping thorough records of the investment and how the funds were used, which can lead to problems if HMRC investigates.
- Exceeding the maximum allowable funding limits for SEIS (£250,000 lifetime) or EIS (£5 million per year), invalidating the tax relief for investors.
- Changing the company's trade within three years of the investment to a non-qualifying trade, which retroactively disqualifies investors from claiming relief.
Frequently Asked Questions
What happens if an investor sells their SEIS/EIS shares before the minimum holding period?
If an investor sells their shares within three years of the share issue date, they will typically lose their income tax relief. They may also have to pay back any tax relief they received.
Can I use SEIS and EIS funding rounds consecutively?
Yes, you can. Typically, a company will raise SEIS funding first when younger and smaller. As you grow, you can then use EIS to raise larger amounts of capital.
Are there any restrictions on how I can spend SEIS/EIS investment?
Yes, the money must be used for a qualifying trade. It must be spent within two years of the share issue date, and it must be used for growth and expansion of the business, not for acquiring another company's shares.
What are the reporting requirements for SEIS/EIS funding?
You must complete and submit compliance statements (SEIS1 or EIS1 forms) to HMRC after issuing the shares to investors. These forms detail the share issue and confirm that the company meets the eligibility requirements.
Practical Tips
- Obtain advance assurance from HMRC *before* offering SEIS/EIS shares to investors. This provides certainty that your company qualifies for the scheme.
- Use a specialist solicitor or accountant experienced in SEIS/EIS to ensure compliance with all rules and regulations.
- Keep detailed records of all SEIS/EIS investments, including share certificates, investor details, and how the funds were used, in case of an HMRC enquiry.
- Inform your investors promptly when you receive SEIS/EIS compliance certificates from HMRC, as this is needed for them to claim their tax relief.
Related Questions
How do I apply for SEIS/EIS advance assurance?
You apply to HMRC's Small Company Enterprise Centre using the online advance assurance form, providing details of your company, trade, and proposed share issue. HMRC typically responds within 4-6 weeks.
What trades qualify for EIS?
Most trading activities qualify for EIS, but certain trades are specifically excluded including property development, financial services, legal and accountancy services, hotels and guest houses, farming, coal and steel production, and energy generation receiving subsidies.
Can directors invest in their own company via EIS?
Generally no. Directors, employees, and anyone who holds more than 30% of the company's shares (or voting rights or rights to assets) are 'connected persons' and cannot claim EIS tax relief. However, SEIS has a partial exception for directors of companies less than 2 years old.
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