Startups

An introduction to EIS for startups

Charles BrecqueCharles Brecque
Last updated on:
May 3, 2022
Published on:
May 3, 2022

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If you have a startup idea or are an early-stage founder, you might consider raising funds from angel investors to get your vision and business off the ground. Private investors in the UK can claim tax benefits through SEIS and EIS investments which means that you can attract these types of angel investors if your company is eligible for EIS funding. This article explains what the Enterprise Investment Scheme is, how it compares to other government venture capital schemes and how to raise EIS funding.

What is SEIS/EIS investment?

The Enterprise Investment Scheme (EIS) is a government investment scheme which offers tax benefits to private investors who reside in the UK and pay UK taxes. Qualifying investors who make qualifying EIS investments can claim tax benefits from HM Revenue and Customs (HMRC). The scheme aims to encourage private investors to invest in tech and innovation in the UK at a stage that might be too risky for institutional venture capital investors. The EIS scheme mitigates the risk of an investment not working out through the tax benefits. The Seed Enterprise Investment Scheme (SEIS) is another venture capital scheme that offers tax benefits to early-stage investors.

What exactly is the difference between SEIS and EIS?

The SEIS and EIS schemes are available to eligible businesses at different stages of their business and offer different levels of tax benefits to eligible investors. The key differences between SEIS and EIS mainly affect investors instead of the businesses fundraising from these investors. However, it is essential to note that a company can't raise SEIS funds if it has already raised funding through EIS or a venture capital trust. If your business is eligible for SEIS and EIS funding, you should consider raising SEIS before EIS if it makes sense strategically.

The key information to know about the Seed Enterprise Investment scheme your startup needs to know about is:

  • You can raise a maximum of £150,000 through SEIS investments.
  • Eligible SEIS investors can claim relief in the form of a reduction of their income tax liability. The reduction is equal to 50% on the amount of the SEIS subscription.
  • Eligible SEIS investors are exempt from capital gains tax (CGT).
  • Eligible SEIS investors can claim some relief when a loss arises.

The key information to know about the Seed Enterprise Investment scheme your startup needs to know about is:

  • You can raise a maximum of £5 million each year and a maximum of £12 million in your company's lifetime through EIS investments. This also includes amounts received from other venture capital schemes such as SEIS.
  • Eligible EIS investors can claim relief in the form of a reduction of their income tax liability. The reduction is equal to 30% on the amount of the EIS subscription.
  • Eligible EIS investors are exempt from capital gains tax (CGT).
  • Eligible EIS investors can claim some relief when a loss arises.

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What types of companies are eligible for SEIS & EIS?

Startup companies need to meet a specific set of criteria to be eligible for SEIS and EIS funding. In particular, the funds raised in the investment round must be used for or to prepare for a qualifying trade (e.g. research and development, which is expected to lead to a qualifying trade). For EIS investments, the money raised by the new share issue must be spent within two years of the investment. The funding must be used to grow or develop the business. It must pose a risk of loss to capital for the investors but must not be used to buy all or part of another business.

Companies which raise SEIS investment must also:

  • be established in the UK
  • not trade on a recognised stock exchange
  • not control other companies unless that company is a qualifying subsidiary
  • not be controlled by another company since the date of the company incorporation

The company raising SEIS funding and any of its qualifying subsidiaries must:

  • not have gross assets over £200,000 when the shares are issued
  • not be a member of a partnership
  • have less than 25 full-time equivalent employees in total when the shares are issued

Companies which raise EIS investment must also:

  • have a permanent establishment in the UK
  • not trade on a recognised stock exchange
  • not control other companies unless that company is a qualifying subsidiary
  • not be controlled by another company since the date of the company incorporation, or have more than 50% of its shares owned by another company
  • not expect to close after completing a project or a series of projects

The company raising EIS funding and any of its qualifying subsidiaries must:

  • not have gross assets worth more than £15 million before any shares are issued and not more than £16 million immediately afterwards
  • have less than 250 full-time equivalent employees at the time the shares are issued

What can your company use the SEIS and EIS investment for?

The investment raised must pose a risk of capital loss to investors, and the funding must be used to support growth and development. This means that money raised will develop a product, grow a customer base or hire employees. These activities are risky for startups because startups are often disrupting existing markets or creating new ones.

How to find EIS investors for your startup?

To find EIS investors for your startup, you can identify prominent angel investors or contact business angel groups that might make syndicate investments. You may also reach out to institutional investors who manage SEIS or EIS funds on behalf of retail investors. Once you have identified relevant investors, you will need to prepare a pitch and anticipate answers to key investor questions. Investors might also ask you for advance assurance that your startup company is eligible for EIS or SEIS funding during the due diligence phase.

You will need to demonstrate that you have secured your business' intellectual property via robust employment contracts during the fundraising process. However, founders tend to save on legal fees to focus time and resources on the growth of the business. This is an unnecessary risk that can jeopardise the company in the long term, which is why founders should consider using Legislate. Legislate is a contract management platform that offers a suite of employment contracts and documents that are lawyer-approved and tailored to your specific requirements. To create contracts cost-effectively, simply create an account and purchase a plan for only £9.95.

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