British business has received a boost after the Chancellor laid out plans to make the UK the most competitive major economy in the world. It is widely acknowledged that the success and growth of SMEs is integral for the UK's return to a stable growth economy. In order to address the funding gap, UK is on a mission to have the world’s most competitive tax scheme for investors into start-ups and scale ups. Two such existing schemes are SEIS and EIS.
We therefore asked Crowe Clark Whitehill, one of the UK‘s leading audit, tax and advisory firms, to explain the key aspect of the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). What it is, how to get it and how to keep investors happy during the process.
What are SEIS and EIS?
SEIS and EIS are designed to help UK companies raise finance by offering tax relief to UK investors on certain new share issues. For the investor, it’s a tax efficient way to invest in your company.
SEIS reliefs for investors – Tax benefits
- Income tax relief of up to 50% of the amount invested in SEIS qualifying shares up to £100,000 in the tax year that the qualifying shares are acquired.
- SEIS investments can be 100% inheritance tax exempt after they are held for two years.
- Investors are normally exempt from paying any capital gains tax from the sale of their SEIS qualifying shares after three years.
- Losses (net of income tax relief already obtained) on SEIS investments can be offset against income or capital gains in the tax year in which the disposal occurs, or in the previous year, or both.
EIS reliefs for UK investors – Tax benefits
- Income tax relief of 30% of the amount invested in EIS qualifying shares can be offset against personal income tax liabilities up to £1 million.
- Investors facing capital gains tax liabilities on other investments can use their EIS investment to defer the capital gains.
- EIS investments can be 100% inheritance tax exempt after they are held for two years.
- Investors are exempt from paying any capital gains tax from the sale of their EIS qualifying shares, provided the shares have been held for at least three years.
How do your shares qualify?
The company will send an application to HMRC once the shares have been issued. HMRC will need to be satisfied that the:
- company is a qualifying company
- shares to be issued will be eligible shares
- shares will be issued to raise money for a qualifying business activity
- the money raised is to be used only by a company that satisfies the rules of the scheme.
Investors will want advanced assurance that your company will qualify
The legislation which governs these reliefs is very complicated with lots of room to fall foul of technicalities.
Before you issue shares you can apply for Advanced Assurance from HMRC. This is a confirmation from HMRC that (based on the information you provide) the shares you issue will be eligible for SEIS or EIS, reassuring investors that they are eligible to claim personal tax reliefs on their investments in your company.
How does your company get Advanced Assurance?
Write a letter to HMRC including the following information:
- a covering letter
- details of the amounts intended to be raised
- details of what these monies will be used for
- details of all trading or other activities to be carried on by the company and any subsidiary
- articles of association
- subscription and shareholders agreement (otherwise called an ‘investment agreement’) or other such similar documentation
- your business plan (sometimes referred to as an information memorandum, or similar document such as a pitch deck)
- recent accounts of the company (if any)
- the company’s corporation tax reference number
- confirmation of the number of shares which qualified for SEIS/EIS previously issued or that the company has not received any previous investment from a Venture Capital Trust
- details of any UK or EU state aid received.
How long does it take?
If you have provided all relevant information and documents with your application in a correct and clear manner then we find that it is currently taking HMRC between six and eight weeks to respond.
If HMRC have any queries they will ask for you to send additional documentation via post, again their response is likely to take an additional six to eight weeks.
Your company has Advance Assurance – now what?
1. Get ready to offer shares in your company to investors
Understand your obligations to your investors. Take professional advice particularly in relation to your offer document and any shareholder agreements. It is only new issues of shares that can qualify under SEIS and EIS.
2. SEIS first, EIS after
If you are planning on fundraising for both ensure that you allow a suitable time to pass between the issue of the SEIS shares and the EIS shares.
3. Watch the gross assets limits for share subscriptions
Make sure that any share subscriptions from investors do not breach the ‘gross assets’ test at the time of the share issue. More likely to be a problem under SEIS with its lower £200k gross assets limit.
To carry on the conversation or find out how Crowe can help you with your Advanced Assurance application please contact us: email@example.com
Authored by Simon Keeling (Simon.firstname.lastname@example.org) and Hazel Lucian (Hazel.email@example.com)
About the author:
Simon Keeling studied engineering before qualifying as chartered accountant, he now works in corporate finance with a focus on the tech and renewables sectors, assisting companies on M&A transactions and raising funds on capital markets.