A Guide to SEIS and EIS

19 April 2022

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EIS (the Enterprise Investment Scheme) was introduced by the government to encourage investors to take a chance on younger, higher risk businesses. It offers tax relief on up to £12 million (£5 million per year) to investors who take a chance and support qualifying companies.

SEIS (the Seed Enterprise Investment Scheme) was created in 2012 to support even smaller businesses. Although you can only claim relief on £150k of investment, it is a great option for new startups that doesn't eat into the EIS allowance.

When you’re starting out, the burden of proof that investors ask for can sometimes seem impossible. This scheme is in place to give you a helping hand. If you’re taking on a new venture and could use an extra incentive to offer investors, then this could be perfect for you.

Knowledge Intensive Companies

As part of the scheme, Knowledge Intensive Companies get some extra perks. To qualify as a KIC your business costs must include any of the following:

  • Research, development or innovation expenses (10% of costs for the last, or future, 3 years, or 15% in any one of those years). 
  • The development of intellectual property that will become a main source of business in the future.
  • 20% or more of your team are conducting research in a role which requires a master’s level of degree or above. 

As a KIC, you can claim £20 million over the lifetime of the business instead of £12 million, and up to £10 million a year instead of £5 million.

 

Are You Eligible for SEIS or EIS?

There are three elements you need to fall into for all the schemes:

  • Less than 20% of your trade should fall into the excluded activities set out by HMRC. This includes banking, royalties, and property development. 
  • A permanent establishment in the UK. 
  • You cannot be in a limited liability partnership.

 

Seed Enterprise Investment Scheme Enterprise Investment Scheme Knowledge Intensive Companies
Less than £200k in gross assets Less than £15 million in gross assets N/A
Less than 25 employees Less than 250 employees Less than 500 employees
Trading for less than 2 years Trading for less than 7 years Trading for less than 10 years
N/A If you have been trading longer for 7 years, have you invested more than 50% of the average turnover for the last 5 years into a new product or geographical market? N/A

 

If you meet all the criteria above, then you’re eligible. However, we highly recommend applying for advance assurance to give you confirmation.

Advance Assurance

Advance assurance is in place to protect businesses and investors from spending time and money on a lost cause. We strongly recommend applying for it to avoid finding out further down the line that you’re no eligible. It is a formal confirmation from HMRC stating that the company is eligible for the SEIS or EIS scheme. Once you’ve received this confirmation, you have 2 years to issue shares under the scheme, but it will give you peace of mind that you can guarantee investors the tax relief.

The information you need to provide when applying for advance assurance is a business plan and financial forecast detailing the next 3 years. HMRC sets out a guideline of what details should be included. While the numbers are obviously important, valuing a business is often a subjective exercise. The level of detail in your plan doesn’t need to be incredibly comprehensive – it can be similar to the kind of pitch deck you would put together for investors – but keep in mind that in this instance, the lower you value the business, the more likely you are to be eligible for the scheme.

It’s also important to take into account any other funding you have already received. Map out any de minimis aid raised in the last 3 years. De minimis aid usually comes from government or university grants (except Innovate UK, this is normally excluded) and are considered too small to affect the competition. If you’re unsure, most grants will confirm in the paperwork if it qualifies. This funding will count towards the cap of £150,000 in the SEIS scheme. So, if you have raised £50,000 de minimis aid in the last 3 years then you will only be able to raise a further £100,000 through the SEIS scheme.

What Next?

Once you have received advance assurance, you need to produce a compliance statement. This is also known as an EIS1 form. This involves a report of the investors involved and details of their shares, including when they will receive them and if they previously owned any shares in the business. Once this is received and checked by HMRC they will issue an EIS2 as confirmation. Finally, you will need to issue EIS3 certificates to investors which they can use to claim their tax relief. 

The termination date for the shares is three years post the date of issue. During this time, the shares and the company  must continue to meet all the requirements of the Scheme to avoid any tax relief being withdrawn. 

Ultimately, as with most things in finance, it’s best to get expert advice. On paper, the process seems simple but it’s vital that you include the correct information, in the right places, at the right time. Having the right help can take the process from a labour intense nightmare to simple and straightforward.