Get expert advice on the do’s and don’ts of using SEIS and EIS venture capital schemes to maximize benefits for your startup.
Introduction
Navigating the complexities of venture capital can be daunting for startup founders, especially when leveraging government-supported schemes like the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). These schemes offer attractive tax incentives to investors, making them crucial for securing funding. However, improper handling can lead to pitfalls that may jeopardize your fundraising efforts and investor relationships. This guide provides essential do’s and don’ts to help you effectively utilize SEIS and EIS venture capital schemes.
SEIS & EIS Tax Relief Schemes: Do’s For Founders
1. Get Advance Assurance
Obtaining advance assurance from HMRC is a vital step for any startup aiming to raise funds through SEIS or EIS. This pre-approval helps ensure that your company and its investment plans meet the necessary criteria, providing potential investors with confidence in the tax relief they can claim. A well-prepared application with accurate information increases the reliability of the assurance, reducing the risk of objections from HMRC after investments are made.
2. Onboard Funds & Issue Shares Compliantly
To maintain eligibility under SEIS and EIS, it’s essential to manage the timing of fund intake and share issuance meticulously:
– Issuing SEIS shares should occur at least one day before EIS shares.
– Issuing both sets of shares simultaneously may require opting for EIS relief on all shares, potentially limiting your tax incentive options.
3. Avoid DIY Approach
The SEIS and EIS schemes come with intricate requirements that can be challenging to navigate without professional assistance. Common mistakes include:
– Applying for relief on non-qualifying shares or existing shareholders.
– Timing errors, such as applying for EIS too late or too early.
– Misunderstanding qualifying trades and investment limits.
Engaging with tax advisors or professionals experienced in these schemes can help prevent such errors and ensure compliance.
4. Be Cautious Ahead of Transactions
Significant transactions can impact your eligibility for SEIS and EIS, so it’s crucial to seek advice before proceeding. Key transactions to monitor include:
– Share Buybacks: May trigger clawbacks of EIS relief if not timed correctly.
– Grants and Allowances: Additional funding must be accounted for within SEIS/EIS limits.
– Joint Ventures & Share Exchanges: Can affect control percentages and trade qualifications.
5. Monitor Spending of SEIS/EIS Funds
Funds raised through SEIS and EIS must be used within specific timeframes and solely for the company’s trade. Implementing robust financial monitoring systems ensures that spending aligns with HMRC requirements, maintaining your eligibility for tax relief.
SEIS & EIS Tax Relief Schemes: Don’ts For Founders
1. Submit an EIS Compliance Statement Before Using SEIS Entitlement
Submitting an EIS compliance statement prematurely can lead to the denial of SEIS relief. Ensure that you complete the correct compliance processes in the appropriate order to retain flexibility in claiming tax incentives.
2. Assume Founders Aren’t Eligible
Founders may be eligible for SEIS or EIS relief under certain conditions. It’s important to consult with tax professionals to understand the specific eligibility criteria and apply correctly when incorporating your company and issuing shares.
3. Assume All Advance Subscription Agreements (ASAs) Are SEIS/EIS Eligible
Not all ASAs qualify for tax relief. Key factors determining eligibility include:
– A six-month longstop date for share issuance.
– The agreement being purely for equity.
– No provisions resembling loan terms.
Always review ASAs with a professional to ensure compliance with SEIS/EIS requirements.
4. Inadvertently Give SEIS/EIS Shares a Preference
SEIS and EIS shares must be ordinary shares without preferential rights, such as liquidation preferences or special dividend rights. Carefully draft your articles of association and shareholders’ agreements to avoid inadvertently granting these preferences.
5. Issue Shares Before Funds are Received
Shares must be subscribed for in cash and fully paid at the time of issuance to qualify under SEIS and EIS. Issuing shares before securing funds can disqualify the investment, undermining the tax relief benefits for your investors.
SEIS vs EIS: Qualifying Conditions
Understanding the fundamental differences between SEIS and EIS is essential for determining which scheme best aligns with your company’s stage and funding needs:
Seed Enterprise Investment Scheme (SEIS)
- Target Stage: Early-stage companies.
- Investment Period: Less than 3 years from the first commercial sale.
- Team Size: Fewer than 25 employees.
- Investment Limit: Up to £250,000.
- Tax Relief: 50% of the investment can be claimed.
- Eligibility for Losses: Investors can claim relief on net investment losses.
Enterprise Investment Scheme (EIS)
- Target Stage: More established businesses.
- Investment Period: Less than 7 years from the first commercial sale.
- Team Size: Fewer than 250 employees.
- Investment Limit: Up to £5,000,000 per tax year; £12,000,000 in total.
- Tax Relief: 30% of the investment can be claimed.
- Eligibility for Losses: Similar to SEIS, investors can claim relief on net investment losses.
Conclusion
Effectively utilizing SEIS and EIS schemes can significantly enhance your startup’s ability to attract investment by providing valuable tax incentives to investors. By adhering to the do’s and avoiding the don’ts outlined in this guide, founders can navigate the complexities of these venture capital schemes with greater confidence and success.
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