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

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.

What’s the outlook for mobile app startups and investors in 2017?

“There’s an app for that”, or some variant of the phrase, is now one of the most common responses to anyone raising a complaint or bemoaning a problem, however small.

Rise and fall of man

The extreme sense of entitlement coupled with the profound idleness that characterises our age has created a market for apps which manage or assist with our dry-cleaning, our sex life, our tampon subscription, our polyphasic sleep-mapping, our pets’ bowel movements…I wouldn’t be surprised if somewhere in the murky depths of the App Store there’s an app for communing with the dead – or perhaps I’ve just been watching too much Black Mirror.

The last decade has seen the rapid and unstoppable emergence of the mobile application. And it’s not just quick-on-the-uptake millennials who are enamoured with this new way of being, by now nearly everyone is a smartphone-toting app addict.

But is this set to last? And what’s the outlook for mobile app entrepreneurs and investors?

The general consensus from anecdotal reports is that mobile app companies are finding it more difficult to raise finance. This requires some unpacking. Thanks to a report from our friends at Beauhurst, who track the funds raised by thousands of seed, venture and growth-stage companies, we can see that the amount invested in mobile apps in the UK reached its highest ever level of just over £560m in 2016 (that’s up from £67m in 2011 and circa £275m in 2015).

Mobile app deal numbers and amount invested 2011-2016
Mobile app deal numbers and amount invested 2011-2016

So what’s the problem? Clearly, there are enormous (and increasing) amounts of capital still being ploughed into the app industry by investors. But hold on, there’s a nuance to this.

The crucial change which gives credence to the consensus is that the stage of the app companies raising money has changed. In 2013, 70% of app companies who raised money were seed stage, but by 2016 that number had dropped to 62% with more investors opting for the more proven venture and growth-stage companies.

So from this, we can see that for early stage app companies the prospect of raising finance has indeed become marginally harder. However, the amounts being invested into the sector are still growing at an impressive rate so for apps good enough to compete, there’s still a world of opportunity.

With thanks to Beauhurst for permission to use their data. You can read their article here

Fundraising Event Report: Last year’s successes encourage this year’s investors

Last Tuesday we held our first fundraising event of the year at the Olswang offices in Holborn. Treated to a complimentary feast of canapés and drinks on the top floor, investors enjoyed pitches from 7 of the hottest UK startups.

James Badgett, Founder of Angel Investment Network, opened the proceedings by calling to mind some of the notable successes from companies who pitched through us in 2015 as well as the general growth of our site.

Here’s an overview of what he said:

Our Website in 2015 – The Numbers
– Reached 450,000 registered entrepreneurs
– Reached 100,000 registered investors
– Averaged 1380 new proposal submitted each week by entrepreneurs
– Over 2 million proposal views
– 75,000+ connections made between investors and entrepreneurs looking for funding

Companies that Pitched in 2015 – Where are they now?

SuperAwesome, a child-safe marketing platform, completed a funding round with us at a valuation of $3million and subsequently completed a $7million raise at a valuation of $25million. They are now raising at a valuation of $70-100million. That’s a potential return for our investors of 20-30 times in a little over a year!

What3Words, an extraordinary piece of software that’s changing the world’s address system and for whom we filled the seed round, recently received $2million from Intel Capital. They also won the Innovation Grand Prix at the Cannes Lions International Festival of Creativity.

Acquisitions:
As covered in a previous blog post, Uncover were acquired by Velocity resulting in strong, quick returns for our investors.

Draper & Dash, a high-end business intelligence company with an absurdly impressive track record, and PASSNFLY, an innovative airport check-in application, are both under offers for acquisition.

After this introduction, it was fascinating to observe the investors sit forward in their seats and treat the latest cohort of entrepreneurs pitching to their undivided attention!

The future is certainly looking rosy for both investors and entrepreneurs…

Latest Success Story: what3words Gets £2.5 million Series A Funding Led by Intel Capital

Over the course of the last year we raised £600k in seed funding for one of the UK’s most promising tech startups, what3words. If you haven’t heard of them yet, you’ll want to watch their video (below) to get in the know about the extraordinary developments they’ve made in geo-location technology, mapping the entire planet into 57 trillion 3m by 3m squares, each with its own three word label.

On the back of the successful seed round, what3words has gained significant traction including contracts with leading geographic information system providers. Their success piqued the interest of Intel Capital who alongside existing Angel Investors have filled a Series A round in the region of £2.5 million.

Here’s the TechCrunch article with more of the details: TechCrunch: what3words Series A