How to raise money through SEIS and EIS
How to raise money through SEIS and EIS
All businesses need funding in order to operate, but particularly so if your company is just starting up or looking to scale-up. Whilst there are no doubt a vast number of funding options available, ranging from traditional informal loans from friends or family to more formal routes such as bank loans, SEIS and EIS are becoming increasingly popular. HMRC reported that, since 1994 when EIS was first introduced, 32,965 companies received around £24 billion in investment. Since 2012 when SEIS launched, 13,800 companies received around £1.4 billion in investment. So, if you’re looking to raise significant capital for your business, learning how SEIS or EIS could work for your company may be the right solution.
What are SEIS and EIS?
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives to promote entrepreneurship, innovation and increased productivity. They are two tax relief schemes which incentivise investment into small high-risk (but also high potential) companies. Eligible companies can utilise SEIS and/or EIS to attract investors in exchange for generous tax reliefs against both income tax and capital gains tax. What’s more, any loss suffered due to poor investment made via SEIS or EIS can be mitigated as part of the schemes.
What is the difference between SEIS and EIS?
Both schemes are aimed at small to medium-sized businesses and have the same purpose – to help businesses grow. However, EIS was implemented by the UK government first and is arguably better suited to larger, more established companies who are looking to scale-up. SEIS followed due to the success of EIS and is more geared towards smaller, younger companies at perhaps the start-up stage. The three main differences between the two schemes are; the eligibility criteria of the companies that can use them, how much they can raise in funding, and the tax relief amount they offer to investors. EIS furthermore has separate rules for companies which are considered knowledge intensive, whereas SEIS makes no such distinction.
How does a company qualify?
For a company to be able to seek SEIS or EIS investment, it must qualify under certain eligibility criteria. SEIS and EIS share 4 of the key conditions including:
- The company must have permanent establishment in the UK. This does not mean that the company has to be a UK company to qualify for SEIS or EIS, but there needs to be sufficient evidence that essential or substantial business operations take place in the UK. This could be demonstrated by either having a branch, factory, or employees in the UK. This is not an exhaustive list of what would constitute as a permanent establishment in the UK and HMRC are likely to consider applications on a case by case basis for companies that are not based in the UK. Applying for Advance Assurance will be valuable for such companies.
- The company is not registered or trading on any of the recognised stock exchange markets at the time that shares are issued, nor does it have arrangements or plans to be listed at a future point at the time shares are issued. This does not mean that the company cannot become quoted on the stock exchange in the future, but it simply means that they cannot have any imminent plans to do so at the time that shares are issued and it can be a consideration afterwards.
- The company cannot be controlled by another company since it was incorporated, or control any other companies itself, unless the company is a qualifying subsidiary.
- The company does not operate in one of the excluded trades, or, if it does, the excluded activity makes up no more than 20% of the business’ activity.
For a company to qualify for SEIS specifically, they need to meet the eligibility criteria which is based on the size and stage of the company:
- The company has been trading for less than two years
- The company has less than £200,000 in gross assets before they receive SEIS investment
- The company has employed no more than 25 employees
- The company has not yet received any EIS funding
For a company to qualify for EIS specifically, it needs to meet the eligibility criteria which is based on the size and stage of the company:
- The company has been trading for less than seven years*
- The company has less than £15 million in gross assets before it receives EIS investment
- The company has employed no more than 250 employees
- The company has no intention to close after completing its business project or series of business projects for which EIS investment was used for
* This is extended to 10 years for knowledge intensive companies.
How much can my company get?
Depending on which investment scheme your company plans to use, there are different maximum amounts of funding you can raise before the maximum is capped. For SEIS your company can receive a maximum of £150,000 and for EIS your company can receive a maximum of £12 million.
One thing that is important to bear in mind is if you are looking to raise SEIS investment, then you may want to make sure that you have not received any de minimis aid in the previous three years. This is because any amount that has been received will be counted towards your SEIS maximum limit and reduce it accordingly. For example, if you received £10,000 in de minimis aid in the past 3 years, you will only be able to raise a maximum of £140,000 through SEIS. For most sectors, the maximum limit for de minimis aid is €200,000 (the equivalent of around £173,000) and so a large sum received as de minimis could prevent you from seeking out any SEIS investment at all. However, there is nothing to stop you from applying for de minimis aid after you have exhausted the SEIS limit because de minimis aid does not count towards the EIS limit.
Can a company use both SEIS and EIS?
There are no regulations that prevent a company from using both SEIS and EIS; however there are particular rules on how you must do this. SEIS is predominantly aimed to support start-up companies, and so if you have raised EIS (which is intended for scale-up companies) then you will not be able to go back and apply for SEIS thereafter.
HMRC guidelines specifically stipulate that you cannot raise SEIS and EIS in the same day. Nevertheless, in practice, many companies choose to raise both SEIS and EIS funding at the same time. They are able to do this by ensuring that SEIS shares are issued first, and then EIS shares are issued at least a day later.
What can the money be spent on?
Securing any form of investment will always be great news for a company, but investors will also be looking to receive a good return. HMRC also wants to ensure this and so therefore regulates how money from SEIS or EIS investment can be spent.
- SEIS or EIS money can be spent on a qualifying trade
- SEIS or EIS money can be spent on preparations to carry out a qualifying trade (so long as your company starts to trade within two years of receiving the investment)
- SEIS or EIS money can be spent on research and development that is expected to lead to a qualifying trade
Most trades will qualify apart from those which have been specified in the excluded trades list. Importantly, there is also a time limit clause where you must spend all the funds raised from SEIS within 3 years of receiving it and all funds raised from EIS within 2 years of receiving it. The money must also be spent on activities which will promote growth and development of the company such as hiring new employees, developing products or services or marketing costs to help boost sales.
What can the money not be spent on?
As the primary aim of both the SEIS and EIS schemes is to support company growth and increase profitability, the money received is also restricted on what it cannot be spent on:
- It cannot be used to acquire assets or other companies
- It cannot be used to pay off outstanding company debts
- It cannot be used to pay cash dividends to shareholders
- It cannot be used to purchase land or finance the lease of land
How to apply for SEIS or EIS and complete compliance
The first step companies should take when looking to seek SEIS or EIS investment is to apply for Advance Assurance (AA). Although not a mandatory step, it will significantly improve your chances of attracting investors and so it is worthwhile spending the time to do so. You can apply for AA by completing the online form for HMRC. There is also a checklist for SEIS and EIS on documents you should provide alongside your AA application.
Once you have found investors and have received the money, you can then issue ordinary shares in your company (which must be no more than 30%). It is crucial that you receive payment in full before any shares are issued and cash is received as opposed to any assets or this will invalidate your SEIS or EIS scheme (which means investors will not receive their tax relief).
The company must then be trading for four months or have spent at least 70% of the investment before it should complete its compliance statement. This is an online form SEIS1 or EIS1 to be completed which confirms that you have been spending the investment according to the rules. If the Small Company Enterprise Centre (SCEC) approves your application it will issue an SEIS2 or EIS2 form (which is also referred to as the approval certificate) as well as an SEIS3 or EIS3 form which is what you need to pass onto your investors. The SEIS3 or EIS3 form is what will enable your investors to claim their tax relief.
Get help with SEIS or EIS
Although the SEIS and EIS procedure is relatively straightforward, it also requires a meticulous and exact application. For AA, you are unable to appeal a decision if your application is rejected so you will not get an opportunity to correct or amend your form and try again. Similarly, ensuring you stay compliant to all the rules of SEIS and EIS throughout the time period of receiving investment, issuing shares, spending the funds and completing your compliance statement accurately is critical to not invalidating your eligibility. Ridgefield Consulting offers support with your application as well as guide your through the process to warn you of common pitfalls and compliance requirements. To discuss our service, please use our contact form to book in for a consultation.
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