What are the implications on SEIS and EIS if your company receives State Aid?

Posted by on May 12th, 2020

What are the implications on SEIS and EIS if your company receives State Aid?

NOTE: Following the United Kingdom’s departure from the European Union on 31 January 2020, we have now entered into a transition period. This time-limited period was agreed as part of the Withdrawal Agreement and is currently scheduled to last until 31 December 2020. Until then, it will be ‘business as usual’ for citizens, consumers, businesses, investors, students and researchers, for instance, in both the EU and the United Kingdom.

The EU and the United Kingdom will use these months to negotiate a new and fair partnership for the future, based on the Political Declaration agreed between the EU and the United Kingdom in October 2019.

The transition period commenced on 1 February 2020 and ends on 31 December 2020. It can be extended once only by up to one or two years. Such a decision to extend the transition period must be taken jointly by the EU and United Kingdom before 1 July 2020.

During the transition period, the United Kingdom is no longer a Member State of the European Union or of the European Atomic Energy Community. As a third country, it will no longer participate in the EU’s decision-making processes. It will also no longer be represented in the EU institutions (such as the European Parliament and the EU Council of Ministers), EU agencies, offices or other EU bodies.

However, and as agreed with the United Kingdom:

  • All EU law, across all policy areas, is still applicable to, and in, the United Kingdom, with the exception of provisions of the Treaties and acts that were not binding upon, and in, the United Kingdom before the Withdrawal Agreement entered into force. In particular, the United Kingdom will remain in the EU Customs Union and in the Single Market with all four freedoms (of movement of goods, capital, persons and services) and all EU policies applying.

The contents of this blog post therefore continues to be applicable and should be read accordingly.

What is State Aid?

State Aid is governmental support granted by a Member State (a public body or publicly-funded body) to a specific entity (i.e. a company that produces goods and/or services to be put on a given market) that does not need the EU Commission’s pre-approval in order for it to be granted (in the case of SEIS).

To be classed as De Minimis State Aid (for the purposes of SEIS applications only), the aid received must come within the meaning of Article 2 of Commission Regulations (EC) No 1998/2006. This provides that the total de minimis aid granted to any one undertaking (i.e. a company) over any period of three fiscal years shall not exceed €200,000.

Following from the above, if you own or manage a company that is seeking to raise investment pursuant to SEIS and EIS and have previously received (or are planning to receive in the future) some form of governmental support (such as a governmental grant or loan) then you will need to take into consideration the information contained in the remainder of this blog post.

Why does the EU Commission put a limit on State Aid?

The rationale behind the State Aid maximum limit of €200,000 is rooted in competition law. The UK in particular supports the implementation of rules regulating State Aid in order to create a competitive and open market in the EU that facilitates UK companies’ growth and development. It would clearly distort competition and affect trade between Member States of the EU if companies within such jurisdictions were legally able to receive unlimited financial support from the government. In such a case, the result could be that large corporations are able to more easily access State Aid and the SMEs have limited access or cannot secure any at all. This could lead to economies becoming imbalanced and would result in SMEs potentially going out of business more frequently.

Despite there being an upper limit on the amount of State Aid that companies can receive, the EU Commission does recognise that the provision of a certain amount of State Aid is needed in order to allow Member States to meet wider Community objectives. This is why the Commission does allow companies to receive some State Aid but ensures that all companies no matter what their size are limited to raising a maximum of €200,000 in State Aid.

The EU Commission has also put various exceptions in place – two of which are SEIS and EIS. In the case of the EIS it is the whole tax-advantaged investment in the target companies by the investors which constitutes State Aid.

This form of aid is permitted so long as the EU Commission approves it as coming within the framework of the Community Guidelines on State Aid to promote risk finance investment, which expands on Article 21 of the General Block Exemption Regulation. These guidelines set the requirements, for example that a company raising money pursuant to EIS must have less than 250 full-time equivalent employees and have less than £15 million worth of gross assets immediately before the share issue (or £16 million worth of gross assets immediately afterwards).

Investment made under the SEIS also qualifies as State Aid. The level of aid provided by this scheme (a maximum of £150,000) falls below the level at which notification to the Commission is mandatory provided the scheme otherwise complies with the EU Commission’s regulations on de minimis aid.

What are the implications on SEIS if your company receives State Aid before commencement of your investment round?

Under SEIS, companies can raise up to a maximum of £150,000 and any funding received in the three years up to and including the date of the investment that is considered to be de minimis state aid is to be included within this limit. Therefore, if a company wished to raise the maximum amount of £150,000 but had already received a governmental loan or grant for £20,000, then that company would only be able to raise a further £130,000 pursuant to SEIS. Any excess that you raise above the £150,000 limit will not qualify for SEIS and would be raised pursuant to EIS.

If your company is seeking to raise funds pursuant to SEIS then Article 2 of Commission Regulations (EC) No 1998/2006 provides that your company is able to raise up to a maximum of €200,000 in State Aid (anything raised under this is seen as being de minimis State Aid) and anything raised under that amount will not require your company to receive the EU Commission’s pre-approval in order for it to be granted. As above, any de minimis state aid you receive will decrease the amount of investment you can raise pursuant to SEIS. This means that if you receive governmental support in the form of a grant or a loan that is worth £150,000, then you would not be able to raise money from other qualifying third-party investors pursuant to SEIS.

What are the implications on EIS if your company receives State Aid before commencement of your investment round?

Under the EIS, qualifying companies can raise up to £5 million per year, and a maximum of £12 million over the company’s lifetime. As with SEIS, any funding received in the three years up to and including the date of the investment that is to be considered State Aid is to be included within this limit. So, if a company receives a governmental loan or grant worth £200,000 in financial year 2019/20, then that company would only be able to raise a further £4.8 million pursuant to EIS in that financial year. Any investment raised above the £5 million annual EIS limit would not qualify for EIS.

HMRC guidance on State Aid

VCM2040 confirms that the SEIS is a de minimis State Aid and the EIS is an approved State Aid.

This guidance manual confirms that the beneficiary of the aid is the company receiving the investment.

For all the venture capital schemes (including both SEIS and EIS), HMRC is obliged to keep records of all tax-advantaged investment obtained by companies under the schemes in sufficient detail to demonstrate that aid is justified, and to make those records available to the EU Commission upon request.

Please click here for further information on State Aid generally.

Summary

The upshot of this blog post is that any governmental support your company receives will amount to State Aid and will consequently reduce the amount that your company can raise pursuant to SEIS and EIS.

If you would like to discuss submitting an SEIS / EIS advance assurance application, or if you would like to know more about the process and our fees, we offer a 20-minute no cost, no obligation call as a starting point. If this is of interest, please get in touch via the wewillhelp@jonathanlea.net email address to schedule a call with one of our fee earners.

About Simon Brooks

Simon is a trainee solicitor focusing mainly on business law related matters. He joined The Jonathan Lea Network in 2018 as a paralegal and commenced his training contract with the firm in 2019.

The Jonathan Lea Network is an SRA regulated firm that employs solicitors, trainees and paralegals who work from a modern office in Haywards Heath. This close-knit retain team is enhanced by a trusted network of specialist self-employed solicitors who, where relevant, combine seamlessly with the central team.

If you'd like a competitive quote for any legal work please first send an email to wewillhelp@jonathanlea.net with an introduction and an overview of the issues you'd like to discuss, following which someone will liaise to fix a mutually convenient time for a no cost no obligation initial call with one of our fee earners