Benefits of the EIS and SEIS scheme
EIS provides tax incentives to investors taking up new equity investment in trading companies. It does not benefit the company.
The Seed Enterprise Investment Scheme (SEIS), similar to Enterprise Investment Scheme (EIS), is designed to help small, early-stage companies to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies
- An investor obtains income tax relief for EIS investments at a rate of 30% on the amount of his investment in eligible shares in the tax year (50% for SEIS).
- It is possible to ‘carry back’ all or part of the investment to the preceding tax year
- An exemption from capital gains tax is given for disposals of relevant shares made after the three years after issue in respect of the share issue, provided that the EIS income tax relief has been claimed and has not been withdrawn.
- An important relief is the ability to defer part of a chargeable gain on the disposal of an asset of any description by an investment into EIS shares. *For this element of relief the 30% shareholding limit does not apply.
Criteria to be met
The fully detailed rules are beyond the scope of this summary which lists only the criteria most relevant to many small businesses.
The company cannot be involved in dealing in goods (other than wholesale and retail distribution), leasing, receipt of royalties and licence fees, property development, farming or market gardening, forestry activities and timber production, the operation of hotels, nursing homes and residential care homes and the provision of legal and accounting services. Production of energy (e.g. solar or wind farms) was added to this list of excluded activities.
The company must be operating a qualifying trade for at least three years from the investment.
The company must not be under the control of any other company for at least three years from the investment.
It is possible, and does happen from time to time in practice, for EIS tax relief to be given but later withdrawn if a company fails to meet either of these criteria.
For SEIS the company that has been invested in must have been trading for less than 2 years at the time of investment, must have less than 25 employees and gross assets less than £200,000
For EIS the company that has been invested in must have been trading for less than 7 years at the time of investment (some exceptions can apply including entering a new product or market); have less than 250 employees and gross assets of less than £15M
The company must have a ‘permanent establishment’ in the UK
The investor must:
• not be connected with the company
• not be a director or employee, and not be an owner of 30% of the shares*. (directors can invest under SEIS but no EIS)
• not have any linked loan or and reciprocal arrangements;
• must subscribe for the shares for genuine commercial reasons and not as part of some scheme or arrangement which has a main purpose of avoiding tax
•must not be an existing investor unless all shares held were issued under EIS/SEIS or were subscriber shares issued on incorporation.
The shares issued must be relevant shares which comply with the following conditions:
• they are ordinary shares which do not carry any present or future preferential rights to dividends or assets on a winding-up, nor any present or future rights to be redeemed, and
• they must be subscribed for wholly in cash and fully paid up at time of issue (ITA 2007, s. 173).
• the shares must be held for at least three years
• must be issued by 6 April 2025
In addition, the shares must be issued for bona fide commercial reasons and not as part of any tax avoidance scheme (ITA 2007, s. 178). The monies raised from the issue of the relevant shares must be used within two years, wholly for the purposes of the qualifying business activity for which it was raised (ITA 2007, s. 175(1)).
• for EIS the limit is £5M per year.
• for SEIS the amount is limited to £150,000 and must be used within three years
Setting up a scheme
The basics of setting up a scheme include:
- obtain advance clearance from HMRC that you qualify for the scheme. This is usually done at least two months in advance of issuing the shares. The form is here.
- send HMRC SEIS1 or EIS1 after at least 70% of the money has been spent or the company has traded for four months; and within two years of the shares being issued.
- If the HMRC accepts that the company, its trade, and the shares all meet the requirements of the scheme, it will issue a form EIS2 to that effect, and supply sufficient forms EIS3 for the company to send to the investors so they can claim tax relief.
- The company is obliged to notify HMRC within 60 days if any event occurs before the third anniversary of the date of issue of the relevant shares as a result of which the claim is no longer valid.
There are many pages and help-sheets available from HMRC on Gov.UK. A good starting point is Guidance Enterprise Investment Scheme.
As with all of our tax tips and web pages this information is necessarily summarised and of a general nature. If you would like detailed specific advice please contact us.