How do I raise funds for my small business with EIS/SEIS schemes?

/ Posted By - Bradleys Accountants / Categories - Advice for Small Businesses

Starting a small business is an exciting and arduous journey. There is never a dull moment as you set things up, work on your product, invest in marketing and get your brand off the ground – and the biggest challenge lies in ensuring you have enough funding as and when you need it.

The UK government is keen to help new businesses succeed, so it established EIS and SEIS schemes to give investors significant tax breaks when they fund new ventures.

Since 1993, these schemes have raised over £23 billion for over forty thousand businesses – a boon for entrepreneurs during the critical early years. Let us dive a little deeper into how EIS and SEIS schemes work and how you can use them to get funding for your business:

What are EIS and SEIS schemes?

EIS and SEIS stand for Enterprise Investment Scheme and Seed Enterprise Investment Scheme, respectively. They encourage investors to invest in small businesses by giving them a Capital Gains Tax exemption as well as a tax reduction (50% for SEIS and 30% for EIS).

Moreover, investors are given a relief loss if the small business is forced to shut down, thus offering a safety net for their money. Essentially, the schemes were designed to lower the investment cost and therefore, attract more startup funding.

As an entrepreneur, it is essential for you to note that EIS and SEIS schemes are incentives, not sources of cash. You do not directly get any money from it – rather, investors are encouraged to invest their money in you because they get generous tax breaks in return.

What is more, procuring an EIS/SEIS certificate is not too expensive - you just need to apply to HMRC and pay for the paperwork. Offering the certificate to your investors is a big incentive for them - and an excellent way for you to attract up to £5 million per tax year (more on this below).

What is the difference between EIS and SEIS?

Both schemes are designed to attract funding to high-growth UK-based businesses that need financial support as they scale up. However, several key differences in how they work could affect your eligibility for either.

We can sum up the differences between EIS and SEIS schemes as follows:

  • SEIS exclusively targets startups and early-stage businesses – those with less than 25 employees and less than three years of trading history. EIS can be used by larger businesses with a maximum of 250 employees and up to seven years of trading history.
  • Under SEIS, a business can accept a maximum of £250,000 in total funding. Under EIS, a business can accept up to £12 million in total funding and up to £5 million in any tax year.
  • SEIS funds have to be spent within three years. This timeline is two years for EIS funding.
  • Investors can invest up to £200,000 in SEIS funding in any tax year. This maximum is £1 million per tax year for EIS funding.
  • Only individual investors can invest in SEIS funding. EIS funding can come from both individual and corporate investors.

Business eligibility for EIS/SEIS

If you want to attract funding from EIS and SEIS schemes, you must be a qualifying trade or business established in the UK. In addition, here are the individual eligibility criteria you must meet:

SEIS qualifying criteria for very early-stage startups

  • Not a partnership
  • Cannot have received EIS funding
  • Has less than three years of trading history
  • Has a maximum of 25 full-time employees or fewer
  • Has maximum gross assets of £350,000 when shares are issued
  • Has not been controlled by another company since incorporation
  • Is not controlling another company, except qualifying subsidiaries

EIS qualifying criteria for slightly more mature but still early-stage companies

  • Has fewer than 250 full-time employees
  • Has less than seven years of trading history
  • Has maximum gross assets of £15 million when shares are issued
  • Has no plan to shut down after completing a certain number of projects
  • Is not controlling another company unless it is a qualifying subsidiary
  • Is not be controlled by another company since incorporation, or does not have more than 50% of its shares controlled by another company

In addition, HMRC has a checklist of trades that are not eligible for either scheme, including property development, hire-purchase financing, coal/steel production, and managing or operating hotels.

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    Investor eligibility for EIS/SEIS

    As we mentioned above, corporate investors are only allowed for EIS funding. SEIS funding can come only from individual investors. Moreover, the tax benefits only apply if the investors have held the shares in your company for at least three years.

    This is to ensure that the schemes only benefit genuine investors who want to support new businesses and are not just out for a quick gain. Certain categories of investors are not eligible for relief under EIS and SEIS schemes:

    • Relatives of individuals who are closely involved with your business (with the exception of siblings)
    • Investors and their associates who collectively have over 30% of your share capital
    • Business partners of those closely involved with your business

    What can your small business spend the funding on?

    Funds that your small business raises from EIS and SEIS schemes need to be spent on a qualifying trade, preparation for a qualifying trade, or research that will eventually lead to a qualifying trade.

    EIS funding cannot be used to buy shares of any kind. SEIS funding cannot be used to buy shares unless they are part of a qualifying 90% subsidiary that will spend the money on a qualifying business activity.

    Can a business raise money under both EIS and SEIS schemes?

    If you want to raise funding under both schemes, you must raise the initial funds using SEIS (up to £250,000) and then move on to EIS for more.

    The HMRC rules state that while you can apply for both simultaneously, EIS investments can only be raised at least one day after any SEIS investments. In addition, no shares under SEIS or EIS can be issued unless fully paid up for.

    What is Advance Assurance for EIS and SEIS schemes?

    Investors need to know that their money will be spent on the right things – a requirement to get their tax breaks. You need to apply for an Advance Assurance (AA) from HMRC. The details you must mention include:

    • Your business plan and financial forecasts
    • Details of how much funding you hope to raise
    • Details of all your trading and business activities
    • Details of what you plan to spend the funding on
    • All documents to certify that you qualify for SEIS/EIS schemes
    • Documented agreements between your company and shareholders
    • Details of any schemes under which you have previously raised funding
    • Copies of your latest accounts, your memorandum and articles of association
    • Documents that you have been using to explain your business to potential investors

    You must file your application via a company secretary, director or agent appointed to act on your behalf. If the HMRC approves your AA application (which can take up to eight weeks), they will supply a certificate stating that your investment will likely qualify for EIS/SEIS funding.

    You can then share this with potential investors to assure them that you meet the SEIS/EIS criteria upfront.

    What happens after you have obtained your funding?

    Once the SEIS/EIS funding round is complete, you share a compliance certificate with HMRC so your investors can get their tax relief.

    Once this certificate is approved, HMRC will issue a unique investment reference number to each of your investors, which they must use to claim their relief amount.

    How to choose between EIS and SEIS schemes for your business

    Choosing an appropriate scheme to raise your funding depends on your needs and qualifying criteria. Here is a simple way to know which scheme to go for:

    • If you meet EIS criteria but not SEIS criteria – EIS
    • If you meet SEIS criteria and need up to £250,000 – SEIS
    • If you meet both and need more than £250,000 – either EIS entirely or first SEIS and then EIS

    In conclusion

    We hope this helped you understand how EIS and SEIS schemes operate, what advance assurance is and the EIS/SEIS qualifying criteria you need to be mindful of.

    We will sign off by reminding you that funding is only part of the journey, and your chances of success are greatest if you have a market-ready product and excellent customer service for your target audience.

    If you need expert guidance with planning your funding and preparing your AA application, contact our team today. Let us assist you in determining if SEIS/EIS equity financing aligns with your needs.

    We are here to help you ready SEIS and EIS certificates for your investors and handle your scheme application. Should you have any questions posed by HMRC, we are prepared to address them.

    With our assistance, boost your investment appeal and be positioned to secure funds after obtaining HMRC’s approval.

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