SEIS vs EIS: Understanding the Key Differences for Your Business

Explore the fundamental differences between SEIS and EIS, and learn why early-stage businesses should understand these investment schemes.

Understanding the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is crucial for early-stage businesses in the UK seeking investment. These government-backed schemes offer significant tax incentives to investors, making them attractive options for funding. This guide will delve into the key differences between SEIS and EIS, helping your business make informed decisions when accessing these investment opportunities.

What is SEIS?

The Seed Enterprise Investment Scheme (SEIS) is designed to support very early-stage companies. It encourages investment in startups by offering investors substantial tax reliefs, including:

50% income tax relief on investments up to £100,000 per tax year.
Capital gains tax (CGT) reinvestment relief, allowing investors to defer CGT by reinvesting gains into SEIS-qualifying companies.
Inheritance tax (IHT) exemptions, with SEIS shares held for at least two years being 100% exempt.

SEIS is ideal for startups with fewer than 25 employees, less than £200,000 in assets, and less than three years old. This scheme is particularly suited for businesses in their nascent stages, often pre-revenue or just beginning to generate revenue.

What is EIS?

The Enterprise Investment Scheme (EIS) targets slightly more mature businesses compared to SEIS. It aims to boost investment in growing companies by providing:

30% income tax relief on investments up to £1 million per tax year (£2 million for knowledge-intensive companies).
Capital gains deferral, allowing investors to defer CGT by reinvesting gains into EIS-qualifying companies.
Inheritance tax (IHT) exemptions, similar to SEIS.

EIS caters to businesses with up to 250 employees (500 for knowledge-intensive companies), gross assets not exceeding £15 million before investment, and up to seven years old (ten years for knowledge-intensive companies). These companies typically have some market traction and seek additional capital to scale operations or enter new markets.

SEIS vs EIS: Key Differences

Target Companies and Stage of Growth

SEIS is intended for very early-stage companies, often startups in their initial phases.
EIS targets more established small businesses that have begun generating revenue and are in growth phases.

Investment Limits

SEIS allows companies to raise up to £250,000 in total, with a gross investment limit of £350,000 when combined with other schemes.
EIS permits companies to raise up to £5 million annually (£10 million for knowledge-intensive firms) and a lifetime limit of £12 million (£20 million for knowledge-intensive companies).

Investor Tax Benefits

SEIS offers 50% income tax relief on investments up to £200,000 per tax year, along with significant CGT and IHT exemptions.
EIS provides 30% income tax relief on investments up to £1 million per tax year (£2 million for knowledge-intensive companies), with CGT deferral and IHT benefits.

These tax incentives make both schemes highly attractive to investors, though SEIS offers more generous reliefs due to the higher risk associated with early-stage investments.

Eligibility Criteria

For SEIS

A company must:

Have fewer than 25 full-time employees.
Possess gross assets not exceeding £350,000 before SEIS investment.
Be less than 3 years old at the time of investment.
Operate as a permanent UK establishment, conducting most business activities within the UK.
Engage in a qualifying trade, excluding sectors like banking, insurance, legal services, and property development.

For EIS

A company must:

Have fewer than 250 full-time employees (500 for knowledge-intensive companies).
Possess gross assets not exceeding £15 million before investment (£16 million after).
Be less than 7 years old (10 years for knowledge-intensive companies) from the first commercial sale.
Operate as a permanent UK establishment, with most business activities within the UK.
Engage in a qualifying trade, similar exclusions as SEIS.
Not exceed the lifetime funding limit of £12 million (£20 million for knowledge-intensive companies).

Investment Amounts

SEIS for Businesses: Investors can invest up to £200,000 per tax year.
EIS: Investors can invest up to £1 million per tax year, or £2 million if at least £1 million is invested in knowledge-intensive companies.

Both schemes require that the shares issued are ordinary, non-redeemable, and without preferential rights. Additionally, investors cannot hold more than 30% of a company’s total shares or be connected to the company as employees to qualify for tax reliefs.

Raising SEIS and EIS Together

Companies can leverage both SEIS and EIS to maximize funding opportunities. However, SEIS and EIS funds cannot be raised for the same shares simultaneously. The typical approach is to:

Raise up to £250,000 under SEIS first.
Raise additional funds under EIS, up to the annual and lifetime limits.

This strategy allows startups to benefit from the generous SEIS tax reliefs initially and then attract further investment through EIS as the company grows and reduces risk for investors.

How to Use SEIS and EIS Funding

SEIS and EIS funds should be utilized to drive genuine business growth. Acceptable uses include:

Business Growth and Expansion: Hiring new staff, expanding into new markets, scaling operations.
Product Development: Developing new products or enhancing existing offerings.
Marketing and Sales: Funding marketing campaigns and customer acquisition strategies.
Research and Development (R&D): Conducting research or developing new technologies.
Purchase of Assets: Acquiring necessary equipment or software.

Restrictions:

Not for Repaying Existing Debt: Funds must support future growth, not cover past financial obligations.
No Acquisition of Shares: Funds cannot be used to buy shares in other companies.
No Property Development: Funds must not be used for property-related activities.

Final Thoughts

Understanding the differences between SEIS and EIS is essential for early-stage businesses seeking investment. These schemes not only provide crucial funding but also offer significant tax incentives that can attract a broad base of investors. By strategically utilizing SEIS and EIS, your business can secure the necessary capital to grow while providing investors with attractive returns and tax benefits.

Ready to take advantage of SEIS and EIS for your business? Explore Oriel IPO today and connect with investors who can help your startup thrive.