Why Should My Company Obtain SEIS/EIS Approval?
It can be difficult for early-stage companies to attract the investment needed for their growth and development as they may be viewed as risky and illiquid investments. The Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) were created to incentivise individual investors to invest in (risky) qualifying early-stage companies. Investors can take advantage of both income tax reliefs and capital gains tax reliefs through their SEIS/EIS qualifying investments.
In 2021/22, 2,270 companies (7.8% increase from 2020/21) raised a total of £205 million (16% increase from 2020/21) under the more tax-advantageous SEIS – the highest total amount raised since the scheme was introduced.
Under the more accessible EIS, 4,480 companies (19% increase from 2020/21) raised a total of £2,305 million in 2021/22, a 39% increase compared to the preceding year – the highest number of companies and the highest total amount raised since the scheme was introduced in 1994.
This trend of increased investor participation in SEIS and EIS highlights the growing need for early-stage companies to offer qualifying shares.
What are the tax reliefs available to SEIS/EIS investors?
Income Tax Relief
Under SEIS and EIS, an investor can claim income tax relief for the tax year in which they make their investment or the tax year before. This reduces the amount of income tax that the investor has to pay on their earnings for the tax year in which they choose to claim the relief.
Each year, a SEIS investor can claim income tax relief of 50% on up to £200,000 of their investment (so the maximum amount of income tax relief available is £100,000). In 2021/22, 9,950 SEIS investors claimed income tax relief compared to 9,490 in the previous year, and the total value of relief claimed increased by 12%.
An EIS investor can claim income tax relief of 30% on up to £1 million of their investment (or up to £2 million if at least £1 million is invested in knowledge-intensive companies). In 2021/22, 45,155 EIS investors claimed income tax relief compared to 39,025 in the previous year, and the total value of relief claimed also increased.
Many investors and investment funds will refuse to consider early-stage companies as investments unless SEIS/EIS qualifying status can be evidenced.
Capital Gains Tax relief
Capital gains tax (“CGT”) is paid on any gain made when an individual sells an asset that has increased in value.
When an investor sells their SEIS/EIS qualifying shares, they pay no CGT on gains as long as the investor:
- held the shares for at least 3 years; and
- received income tax relief on their investment, which has not been reduced or withdrawn at a later date.
In addition, if an investor sells their SEIS/EIS shares at a loss, they can offset the capital loss (less any income tax relief already claimed) against their income for the tax year in which the loss is made, or the tax year before.
Under SEIS and EIS, investors can reduce or defer the amount of CGT that they have to pay on the gains made on selling an asset by reinvesting the gain in SEIS/EIS qualifying shares.
If a SEIS investor sells an asset, they can use all or part of the gain to invest in SEIS-qualifying shares. This allows the investor to benefit from reinvestment relief where the investor can claim CGT relief on 50% of their reinvestment, up to £200,000 (so the maximum amount of CGT relief available is £100,000).
When an EIS investor sells an asset, they can use all or part of the gain to invest in EIS-qualifying shares. This allows the investor to benefit from deferral relief where the investor does not have to pay CGT on the gain that is reinvested until a later date. This means that to obtain full deferral relief, the investor must invest an amount that is at least equal to the chargeable gain. The reinvestment must be made between one year before and three years after the investor sells the asset. The deferred CGT will need to be paid when:
- the investor disposes of the shares;
- the investment is cancelled, redeemed, or repaid;
- the company stops meeting the scheme conditions; or
- the investor becomes non-resident in the UK.
Can directors claim SEIS/EIS Tax Relief?
Generally, individuals who are connected to the investee company (e.g. an individual employed by the company or an individual related to someone employed by the company) cannot claim SEIS/EIS relief on their investments in the company. However, in some cases, directors of the company may claim tax relief on their investments.
Under SEIS, directors who have invested in their own company can claim tax relief.
Under EIS, only unpaid directors can claim tax relief, unless the payments received by the director are ‘permitted payments’.
However, there is an exception for ‘business angel’ investors who invest in and who wish to become directors of companies that they are not connected to. Despite being paid directors, business angels can qualify for income tax relief. This exception only applies where their only connection to the company is that they are a director who is paid reasonable remuneration for their services and at the time the shares were issued, the director was not connected with the company and had not previously been involved in the same trade as the company.
Directors (and investors) are also subject to the requirement that they do not have a substantial interest (30% or greater of the shares or voting control) in the investee company before or after the investment.
Is my company eligible for SEIS/EIS?
There are specific criteria that your company must meet to be able to issue SEIS and EIS qualifying shares.
To be eligible for SEIS, your company must have:
- been trading for less than 3 years;
- fewer than 25 full-time employees; and
- under £350k in gross assets.
To be eligible for EIS, your company must have:
- been trading for less than 7 years (albeit there are exceptions);
- fewer than 250 full-time employees; and
- under £15m in gross assets.
Another important condition is that your company must be carrying out a ‘qualifying trade’. HMRC exclude a number of activities, which if carried out would mean the company is carrying out a non-qualifying trade.
The above only scratches the surface of the eligibility criteria for SEIS and EIS. The rules applicable are extensive and complex and should be navigated with professional assistance. Please read through these detailed articles for more information on the qualifying criteria:
How can we help?
If you are interested in submitting a SEIS or EIS application, we offer a no-cost, no-obligation 20-minute introductory call as a starting point. Please email firstname.lastname@example.org providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.
This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023.