Explore the benefits, eligibility, and steps to raise capital for your business using SEIS and EIS in our detailed guide.
Introduction to SEIS and EIS
Raising capital is a critical step for any business aiming to grow and thrive. In the United Kingdom, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) have emerged as popular avenues for startups and growing businesses to attract investment. These government-backed initiatives provide significant tax incentives to investors, making them attractive options for both entrepreneurs and investors. This guide delves into the EIS funding process, outlining the benefits, eligibility criteria, and the steps involved in leveraging these schemes to raise capital effectively.
What Are SEIS and EIS?
SEIS and EIS are two distinct but complementary schemes designed to promote investment in high-risk, high-potential startups and growing companies.
Seed Enterprise Investment Scheme (SEIS)
Introduced in 2012, SEIS targets early-stage startups. It offers generous tax reliefs to investors, encouraging them to support new businesses. SEIS is ideal for companies that:
- Have been trading for less than two years.
- Possess less than £200,000 in gross assets before receiving SEIS investment.
- Employ no more than 25 people.
- Have not previously received EIS funding.
Enterprise Investment Scheme (EIS)
Launched in 1994, EIS supports more established companies looking to scale up. It is suited for businesses that:
- Have been trading for less than seven years (extended to ten for knowledge-intensive companies).
- Have less than £15 million in gross assets before EIS investment.
- Employ no more than 250 people.
- Do not intend to close after completing their business projects funded by EIS.
Key Differences Between SEIS and EIS
While both schemes aim to foster business growth, they differ in several aspects:
- Eligibility Criteria: SEIS is geared towards very early-stage startups, whereas EIS caters to slightly more mature companies.
- Funding Limits: SEIS allows companies to raise up to £150,000, while EIS permits up to £12 million.
- Tax Reliefs: Investors receive different levels of tax relief depending on the scheme, with EIS generally offering higher limits.
Eligibility Criteria for Companies
To qualify for SEIS or EIS, companies must meet specific requirements:
Common Requirements
- UK Establishment: The company must have a permanent establishment in the UK, demonstrated through operations like having a branch, factory, or employees.
- Stock Exchange Status: The company should not be listed on any recognized stock exchange at the time of issuing shares.
- Control Conditions: The company must not be controlled by another company unless it is a qualifying subsidiary.
- Excluded Trades: The business should not operate in any excluded sectors, or such activities should constitute no more than 20% of its operations.
SEIS Specifics
- Trading for less than two years.
- Less than £200,000 in gross assets before SEIS investment.
- No more than 25 employees.
- No prior EIS funding.
EIS Specifics
- Trading for less than seven years (extended to ten for knowledge-intensive companies).
- Less than £15 million in gross assets before EIS investment.
- No more than 250 employees.
- Commitment to continued business operations post-investment.
Funding Limits and Considerations
Understanding the funding caps is crucial for effective capital raising:
- SEIS: Up to £150,000.
- Note: Previous de minimis aid within three years reduces the available SEIS funding.
- EIS: Up to £12 million.
Companies may utilize both SEIS and EIS, but not simultaneously on the same day. Typically, SEIS shares are issued first, followed by EIS shares at least a day later to comply with HMRC guidelines.
Appropriate Use of Funds
Investment funds received through SEIS or EIS must be utilized to foster company growth. Acceptable uses include:
- Qualifying Trade: Engaging in core business activities that contribute to growth.
- Preparations for Trade: Activities leading up to the commencement of business within two years for SEIS or two years for EIS.
- Research and Development: Investing in R&D that supports future business operations.
Funds must be spent within three years for SEIS and two years for EIS, focusing on activities like hiring, product development, or marketing.
Restricted Uses
Funds cannot be used for:
- Acquiring assets or other companies.
- Paying off existing company debts.
- Distributing cash dividends to shareholders.
- Purchasing or leasing land.
The Application Process for SEIS and EIS
Navigating the application process is essential to secure funding:
Step 1: Advance Assurance (AA)
Submitting an AA application to HMRC is highly recommended, though not mandatory. AA enhances credibility with potential investors by pre-approving the company’s eligibility.
- Application: Complete the online form provided by HMRC.
- Documentation: Provide a checklist specific to SEIS or EIS alongside your AA application.
Step 2: Issuing Shares
Once investors commit funds, issue ordinary shares (no more than 30% of the company). Ensure investors pay in cash to validate the scheme’s eligibility.
Step 3: Compliance Statement
After four months of trading or after spending at least 70% of the investment, complete and submit the SEIS1 or EIS1 compliance statement. Upon approval by the Small Company Enterprise Centre (SCEC), receive the SEIS2 or EIS2 approval certificate and the SEIS3 or EIS3 forms for investors to claim their tax relief.
Ensuring Compliance and Seeking Assistance
Maintaining compliance throughout the investment period is critical to preserve eligibility. Errors in application or fund usage can invalidate tax reliefs, deterring future investment.
Professional Support: Engaging with consultants or financial advisors can streamline the application process and ensure adherence to HMRC regulations. Platforms like Oriel IPO offer comprehensive support, connecting businesses with investors while providing educational resources to navigate SEIS and EIS effectively.
Conclusion
Leveraging SEIS and EIS can significantly enhance your business’s ability to attract investment by offering compelling tax incentives to investors. Understanding the nuances of each scheme, meeting eligibility criteria, and adhering to compliance requirements are essential steps in the EIS funding process. By strategically utilizing these schemes, businesses can secure the necessary capital to drive growth and achieve long-term success.
Ready to take the next step in raising capital for your business? Visit Oriel IPO today to connect with investors and maximize your fundraising potential through SEIS and EIS.
