As a founder of a UK company, understanding the core tax reliefs for potential investors is crucial when fundraising. Two of the most beneficial schemes available in the UK are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). These schemes provide significant tax reliefs to investors, making your UK company a more attractive and highly incentivised investment opportunity. In this two-part guide, we will delve into the rules and practical points for founders regarding SEIS and EIS to help ensure you understand them and are in a position to benefit from them.

In this Part 1, we will cover:

• Definitions of SEIS and EIS

• The difference between SEIS and EIS

• Key benefits for companies and investors

• Eligibility requirements for companies to benefit from SEIS and EIS

• Additional considerations from our experience with founders, to maximise the benefits of SEIS and EIS

In Part 2, we will explore:

• How to access the schemes and their benefits

• The difference between applying for Advanced Assurance and SEIS/EIS applications after an investment round (SEIS/EIS compliance statements)

• The application process, either independently or with an advisor

• Timeframes for HMRC responses to applications and what to expect

• The commitments to investors and potential risks involved

• Practical tips on ensuring your investment opportunity is SEIS/EIS eligible

Part 1: The Rules

What is SEIS and What is EIS?

SEIS or the Seed Enterprise Investment Scheme is designed to help early-stage companies raise equity investments (raising capital through the sale of shares) by offering tax reliefs to individual investors who purchase new shares in those companies. This scheme is tailored for businesses that are in their initial stages and need capital to grow.

EIS or Enterprise Investment Scheme is similar but targets more established companies looking to expand. While SEIS is aimed at very early-stage startups, EIS is suited for businesses that have moved beyond the initial seed stage but still need investment to grow further.

The Difference Between SEIS and EIS

The primary difference between SEIS and EIS lies in the scale of the benefits they offer:

• Investment Limits: Under SEIS, a company can raise up to £250,000 in total within the first 3 years from their first commercial sale, while EIS allows a company to raise up to £5 million annually and a maximum of £12 million in its lifetime.

• Investor Benefits: SEIS provides 50% income tax relief on investments up to £100,000 per tax year, meaning investors can reduce their tax bill by half of the amount invested. EIS offers 30% income tax relief on investments up to £1 million per tax year, allowing investors to deduct 30% of their investment from their income tax liability.

• Stage of Business: Whilst businesses of various stages and size can benefit from the schemes, as general rule: SEIS is typically for startups in their initial stages raising their first £250,000 from UK tax-paying angel investments, whereas EIS can continue to be utilised by companies that are more established but still need substantial investment (series A+).

Key Benefits for Companies

1. Access to Capital: Both SEIS and EIS make it easier for companies to attract investment by offering attractive tax reliefs to investors who are UK tax payers.

2. Enhanced Credibility: Companies qualifying for SEIS or EIS are often viewed as more credible, given the stringent requirements and due diligence involved.

3. Increased Growth Potential: With easier access to funding, companies can accelerate their growth and development.

Key Benefits for Investors

1. Tax Relief: Investors receive significant income tax relief—50% for SEIS and 30% for EIS.

2. Capital Gains Tax Exemption: Any gains on shares held for at least three years are exempt from Capital Gains Tax. Investors should speak to their tax advisors to confirm the benefits before completing investments.

3. Loss Relief: Investors can offset any losses against their income tax liability, further reducing the financial risk involved.

Eligibility Requirements for Companies

To benefit from SEIS or EIS, your company must meet specific eligibility criteria. Here’s a summary of the requirements:

1. Company Status: Must be a UK-registered company.

2. Business Activity: The company’s trade must be less than three years old for SEIS and less than seven years old for EIS. The trade must also qualify as a high-risk venture (i.e. in industries such as technology, scientific research, or innovative sectors, where there is a higher chance of failure but also a higher potential for significant returns).

3. Gross Assets: For SEIS, the company must have gross assets of £350,000 or less when the shares are issued; for EIS, the limit is £15 million before the investment or £16 million after it.

4. Number of Employees: SEIS allows up to 25 full-time employees, while EIS permits up to 250.

5. Independent Company: The company must not be under the control of another company or must not have more than 50% of its shares owned by another company.

6. Investment Use: Funds raised must be used for a qualifying business activity, usually within two years of the investment.

Other Important Considerations

• Advance Assurance: Advance Assurance is about giving investors confidence that their investments will qualify for SEIS or EIS (i.e. assurance in advance of making their investments). While it's not obligatory, obtaining Advance Assurance is generally advisable to provide investors with full certainty. Applying for Advance Assurance is about demonstrating your company’s eligibility in principle to participate in the schemes. Accelerate Law has a 100% success record in applying for Advance Assurance for our clients - feel free to contact us for support with your application.

• Timing of Investments: SEIS/EIS investments often ramp up close to personal tax deadlines for investors (i.e early April), making it advantageous to clarify early on that your investment opportunity is SEIS/EIS eligible. If possible, it’s best to try and secure funds well ahead of that timing, and to note that the months immediately after April can be a little quieter as a result.

• Limits on Investors: The annual investor limit is set at £200,000 for SEIS and £1,000,000 for EIS (or £2,000,000 if the additional million is invested into ‘Knowledge Intensive Companies’). This means that companies which are eligible for SEIS and EIS investment opportunities are competing with each other for the same funds (as even the wealthiest investors can only benefit from a certain amount of tax relief each year).

• Not all about tax relief: Remember, SEIS and EIS are tax relief schemes, but they won’t absolutely make a company investable. They are an additional benefit and incentive, but they must be sitting on strong foundations and a strong rationale for people to invest in the first place.

• Share Dilution: Be mindful of how new investments can dilute existing shares. It's essential to communicate clearly with existing investors about potential new investment rounds and its impact on their holdings​​. Generally, it’s sensible (and required) for you to offer existing investors the opportunity to invest in future investment rounds.

• Shares issued: The tax reliefs are only available once shares are actually issued. Therefore, if an investor has made an ‘S/EIS investment’ via and Advanced Subscription Agreement, they can’t receive tax reliefs until their investments convert to shares within 6 months.

These schemes not only make your company more attractive to investors which can make the difference when investors make their decisions over whether to invest in your startup or not. In the next part of this guide, we will cover practical points for accessing these schemes and ensuring your applications are successful. Stay tuned for detailed insights on navigating the SEIS and EIS application processes with confidence.

Accelerate Law provides flexible strategic and legal support to startups end-to-end through angel investment rounds and VC funding rounds, which includes supporting with SEIS and EIS matters, flexible funding for example through Advanced Subscription Agreements, and drafting and negotiating investment terms from term sheets through to completion. Accelerate Law also specialise in EMI Schemes for startups. Contact us here to find out more.