SEIS and EIS Tax Relief Explained with a little help from Star Wars…

SEIS

SEIS and EIS are the given acronyms for the generous tax breaks the UK government offers to investors in startup companies. (Seed) Enterprise Investment Scheme. The company must be UK registered and meet certain eligibility requirements. Eligibility is a great way to incentivize investors because it reduces their risk. Dramatically.

As it’s May the 4th. As in May the Fourth be with you. As in Star Wars Day. I thought it appropriate to share an article I wrote explaining the benefits of SEIS and EIS with a few lame Star Wars puns thrown in. You know, to keep it, well, Light.

**This article is relevant for companies registered in the UK only. However, companies registered outside of the UK may find it useful as there may be similar tax breaks offered by their local government.**

What are SEIS & EIS Tax breaks?

Investing in startup companies is generally much riskier than buying shares in much larger more established companies, although the returns are potentially much larger. As a means of offsetting this risk for investors and thereby incentivising them to invest, the UK government offers two attractive tax breaks known as SEIS and EIS (the Seed Enterprise Investment Scheme; and its parent the Enterprise Investment Scheme).

The tax breaks are very generous to investors and have been instrumental in helping the startup industry grow in the UK. As a result, investors now place high value on companies that have qualified for SEIS & EIS.

Because of this, we recommend that all UK companies raising through our platform seek ‘advanced assurance’ for SEIS/EIS if they think they will qualify. As a general rule, if you consider your company early stage then you probably qualify for both, or at least EIS.

What’s SEIS?

HMRC gives the following overview:

“…[SEIS] is designed to help small, early-stage companies raise equity finance by offering tax reliefs to individual investors who purchase new shares in those companies.”

Startups who qualify will be eligible to offer up to £150,000 in SEIS shares to investors.

What are the principal benefits for investors?

  • SEIS is incredibly generous and investors will get 50% tax relief per tax year on investments up to £100,000. (Relief is given each year, but the shares must be held for at least 3 years)
  • Investors will also get Capital gains exemption on the disposal of assets
  • There is a ‘carry back’ facility which allows investors to treat shares as if they were acquired in the previous tax year. Hence the relief can be claimed for the tax year before the investment.

Example:

Angel Investor Skywalker invests £100,000 into ‘Force for Good’, a ground-breaking social enterprise startup which qualifies for SEIS. For the given tax year, Skywalker has a tax liability of £50,000. Because of his SEIS shares he gets 50% of the value of his investment in relief, so £50,000.

This means he pays £0 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company does well, Skywalker would also qualify for exemption from Capital Gains tax (up to £100,000) on the profit provided it is reinvested.

If the company folds, Skywalker will still receive his £50,000 in tax relief meaning only half his initial investment of £100,000 is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £50,000 is £22,500.

So if the company folds, Skywalker will only have lost £27,500 even though he invested £100,000. That’s relief of 72.5%!
SEIS

Does your company qualify?

N.B. These tax breaks are only available to UK based companies; investors do not need to be UK resident but must have some UK tax liability against which to set the tax relief.

For a company to qualify for the SEIS scheme it must meet a number of qualification tests. The list below is not comprehensive as the rules in place are often quite detailed and nuanced, but it gives a helpful, broad picture:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when SEIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the SEIS shares are issued.
  • Your company must have fewer than 25 full-time employees at the time the SEIS shares are issued.
  • The gross assets must not exceed £200k at the time the SEIS shares are issued.
  • Your company must be early stage in that it must not be continuing a trade that is more than two years old at the time the SEIS shares are issued.
  • Your company must not have raised money through EIS or VCT schemes in the three years prior to the SEIS share issue.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

To get formal approval of SEIS eligibility you need to fill out an SEIS1 form and send it to HMRC. Download the form and the notes here.

EIS

What’s EIS?

EIS is the parent of SEIS. The principle is the same – to encourage investors to invest in early stage companies by offering them a generous tax break based on the sum they invest.

When the scheme was launched in 1993 the then Chief Secretary to the Treasury, Michael Portillo, said;

“The purpose of Enterprise Investment Schemes is to recognise that unquoted trading companies can often face considerable difficulties in realising relatively small amounts of share capital. The new scheme is intended to provide a well-targeted means for some of those problems to be overcome.”

EIS is less generous in terms of relief but it is easier for companies to qualify for and there is a larger quota available for eligible companies to offer investors. 

Startups are able to offer up to £2,000,000 in EIS shares.

What are the benefits for investors?

  • Can invest up to £1,000,000 a year in EIS shares.
  • Investors will get 30% tax relief per tax year
  • Any gain is exempt from Capital Gains tax provided the shares have been held for at least 3 years.
  • Loss relief via tax liability upon disposal of shares for a loss
  • Capital gains tax on assets can be deferred if the gain is re-invested in EIS shares
  • ‘Carry back’ facility so the shares can act as tax relief for the previous tax year

Example:

Angel Investor Vader invests £100,000 into ‘Death Star Inc’, a highly disruptive Fintech startup which qualifies for EIS. 

For the given tax year, Vader has a tax liability of £50,000. Because of his EIS shares he gets 30% of the value of his investment in relief, so £30,000. This means he pays £20,000 in tax rather than the £50,000 he owes in tax. This situation is irrespective of how well the company does.

If the company folds, Vader will still receive his £30,000 in tax relief meaning only £70,000 of his initial investment is at risk. When the company folds, he will also be given loss relief of 45% of the ‘at risk’ capital. 45% of £70,000 is £31,500.

So if the company folds, Vader will only have lost £38,500 even though he invested £100,000. That’s relief of 61.5%!

Does your company qualify?

To qualify for EIS your company must satisfy the following criteria:

  • Permanent UK Base- your company must have a permanent UK office or the owner must be a UK resident. This must remain the case for three years from when EIS shares are issued.
  • Your company must not be listed on the stock exchange at the time the EIS shares are issued.
  • Your company must have fewer than 250 full-time employees at the time the EIS shares are issued.
  • The gross assets must not exceed £15 million at the time the EIS shares are issued.
  • The funds raised must be spent within three years.
  • Your company must be independent i.e. it must not be controlled by any other company or anyone associated with that company.
  • Your company must not be a member of a partnership

The full criteria and guidance on how to apply for advanced assurance can be found here on the HMRC website here.

SEIS-EIS

Summary:

If you’re an early stage company registered in the UK and you’re raising money, you really should get advanced assurance for both SEIS and EIS. It can seem a little complicated, but in effect, all you need to do is submit the correct forms to HMRC and let them work out if you qualify.

You can be sure that all your competitors will be doing it – investors are far more likely to invest in an early stage company if they have the guaranteed risk mitigation that SEIS and EIS offer.

This article was originally written by Oliver Jones for Angel Investment Network‘s Learn centre. You can view the original and other similar articles covering all topics related to startup fundraising and investment here.

Author: Oliver Jones

Head of Growth at Angel Investment Network - helping startup businesses succeed by connecting them with angel investors. Now with 625,000+ users. Likes meditation, magic cards and helping + investing in startups...

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