The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are established government incentives that aim to encourage investment in smaller companies. They do this by providing investors with generous tax benefits. Despite being fairly popular schemes amongst both companies and investors, there are still various details about the schemes that go unnoticed. Below we unleash six hidden secrets about the SEIS and EIS Tax Relief Schemes:
- Investors can backdate their SEIS/EIS tax deduction, giving the ability to write off a higher than usual tax amount in a previous tax year.
- Under EIS, businesses can raise up to £5 million each year, and a maximum of £12 million in the company’s lifetime. This also includes amounts received from other venture capital schemes. However, a company must receive investment under a venture capital scheme within 7 years of its first commercial sale.
Companies must follow the scheme rules so that investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from investors if the rules are not followed for at least 3 years after the investment is made. It is noteworthy that there are different rules for knowledge-intensive companies, those that carry out a significant amount of research, development or innovation, and either:
- want to raise more than £12 million in the company’s lifetime.
- did not receive investment under a venture capital scheme within 7 years of their first commercial sale.
- Although SEIS/EIS investors cannot get relief on preference shares, they can get an ordinary share with a liquidation preference that gives the money back first on a sale of the company. Liquidation preference is the right of an investor to prioritise receiving the proceeds from the sale or liquidation of a company.
- It’s commonly assumed that only UK companies can qualify for SEIS and EIS, but companies that have been established abroad can qualify for SEIS/EIS as long as they have a UK branch or subsidiary. However, in order to qualify, HMRC will investigate to ensure that the company passes their UK permanent establishment test. And because this isn’t commonly known, if an overseas company would like to raise funds from UK investors, potential investors will be more likely to want to see advance assurance from HMRC as proof of qualification..
- Company founders can repay personal loans they’ve made to the business with SEIS investment, but not EIS.
- A company qualifies as a knowledge intensive company by meeting one of these conditions:
1) it spent 15% of operating costs on innovation, research or development in 1 of the last 3 years. Plus, 10% of operating costs in each of the 3 preceding years leading up to that year. (If there are employed developers, including contractors, it probably qualifies for this condition).
2) Creating or using IP to create products that become the company’s main business. This includes any hard science innovations, hardware or tech products including software, website code or even an app. (If a company has created IP e.g. a proprietary algorithm, it probably qualifies for this condition).
3) At least 20% of a company’s full-time employees hold a higher education qualification and their work is directly related to that subject. (If a number of Master degree / PhD holders are employed you probably qualify for this condition).
New to EIS/SEIS tax relief schemes? Here are few resources that can help you catch up:
- Investors guide to the enterprise investment scheme and seed enterprise investment scheme
- A step-by-step guide to completing an EIS Certificate (Enterprise Investment Scheme)
- For more information on how SEIS and EIS works please read the HMRC guidance documentation.