This blog takes into account the latest announcements relating to EIS and SEIS made in the Chancellor’s mini-budget of September 2022.
When new Chancellor Jeremy Hunt made his statement on 17 October, he outlined that wider reforms to investment taxes would continue. We believe this means the planned SEIS extension and increases will remain.
EIS & SEIS: What companies and investors need to know
Enterprise Investment Schemes (EIS): Available for eligible investments since the mid-90s and has raised £23 billion for more than 40,000 companies.
Seed Enterprise Investment Schemes (SEIS): Available since 2012, the government incentive aims to draw investment into smaller high-risk companies.
Benefits of EIS & SEIS to investors: Both schemes have similar aims; to provide a variety of tax reliefs to investors who wish to buy shares in a company that qualifies for the scheme. This incentive can help to offset some of the financial risks from investing in a start-up company (and minimise potential losses).
Benefits of EIS & SEIS to start-ups: The schemes can help qualifying companies to secure a source of funding by incentivising investment through tax breaks.
In the Chancellor’s mini-budget (September 2022), it was announced that the SEIS and EIS regimes will be extended beyond the previously planned end-date of April 2025. A revised end-date is not yet known, but the ongoing support is encouraging.
The goal of EIS & SEIS
The differences between EIS & SEIS
The key difference between the two schemes is the threshold that needs to be reached to ensure that your business is a ‘qualifying company’, that can benefit from the schemes. The SEIS targets very early-stage companies, with fewer than 2 years of trading history (this will change to 3 years from 6 April 2023) and up to 25 employees. Investors (individuals, not companies) can invest a maximum of £100,000 per tax year (rising to £200,000 from April 6 2023).Qualifying companies can raise up to £150,000 of funding from SEIS (rising to £250,000 from April 2023).
In comparison, the EIS targets larger start-ups. Companies may qualify to raise funding through EIS if they have fewer than 7 years of trading history, additionally less than £15 million in gross assets and fewer than 250 employees. EIS tax reliefs that are available include Income Tax Relief of up to 30%, Capital Gains Tax Disposal Relief, Loss Relief and Capital Gains Tax reinvestment relief.
EIS & SEIS - summary of key eligibility criteria for businesses
| SEIS (until 5 April 2023) | SEIS (from 6 April 2023) | EIS | |
|---|---|---|---|
| Maximum trading age of business | 2 years | 3 years | 7 years |
| Maximum number of employees | 25 | 25 | 250 |
| Maximum gross assets | £200,000 | £350,000 | £15 million |
How can EIS and SEIS benefit investors?
For investors, the variety of tax reliefs that are available under the schemes is desirable, offering an incentive to counterbalance the risk that comes with investing in smaller start-up companies. In essence, EIS/SEIS can act as an efficient route to invest in companies by mitigating the loss if the company was to fail but magnifying the benefits if the company were to perform well.
The table below sets out how an example of how EIS tax relief works in practice. In this scenario, it is assumed that a higher-rate taxpayer (45%) invests £10,000:
| Company doubles in value | Company breaks even | Company fails | |
|---|---|---|---|
| EIS investment | £10,000 | £10,000 | £10,000 |
| Income tax relief | -£3,000 | -£3,000 | -£3,000 |
| Net investment | £7,000 | £7,000 | £7,000 |
| Proceeds on disposal | £20,000 | £10,000 | £0 |
| Loss relief | N/A | N/A | -£3,150 (£7,000 x 45%) |
| Net profit/loss including income tax relief | £13,000 | £3,000 | -£3,850 |
How can EIS and SEIS benefit start-ups?
If a company is ‘EIS eligible’, then this opens up an efficient and beneficial route to fundraising for the company. Offering a variety of tax incentives to their investors and mitigating the risks of the investment makes it more appealing. Under the EIS, an individual can invest up to £1 million per tax year and £100,000 per tax year under the SEIS (rising to £200,000 after April 6 2023), so a sizeable investment in the business. In turn, this investment can stimulate the growth of the qualifying company into an established, successful company, supporting the growth of the UK economy.
What are the risks of SEIS and EIS?
Investment in EIS/SEIS qualifying companies carries a high level of risk (due to the early business stage), and investors should bear this in mind – with 9/10 start-ups failing. The share prices of smaller start-up companies are likely to be more volatile, reflecting the early life cycle in which they operate. Furthermore, tax relief isn’t always guaranteed, as there is no certainty that the qualifying company will maintain their EIS-qualifying status, and tax laws could change in the future.
Despite these risks, overall, there are clear benefits. As a start-up, the schemes can create a great investment opportunity; helping the business to grow and become an established, successful company.
Get help from Seven Legal on EIS and SEIS
We specialise in working with start-ups and entrepreneurs, helping them to grow their businesses. Our in-house experts can provide you with specialist advice on EIS/SEIS eligibility, and how this could work for you as a potential source of funding and investment.
For more information, check out our client journey and specialisms pages for details of our fundraising and investment support or contact us to discuss your business.
