These schemes are very similar and offer substantial tax incentives to encourage investment in qualifying companies. Although there are stringent conditions imposed upon companies wishing to qualify for these schemes, there are no particular tax reliefs available to the company itself, the incentives are intended for the individual investor that subscribes for new shares in the qualifying company.
Raising finance through SEIS and EIS
SEIS is aimed at early-stage businesses that are starting to trade, while EIS is geared more towards small-to-medium sized start-ups with the aim of growing their existing business.
If the company meets the qualifying conditions required by the SEIS / EIS legislation, for which Advanced Assurance can be sought from HMRC, it can then issue new qualifying shares to the investor who then applies to HMRC for the tax reliefs available. A strong business plan as well as financial forecasts detailing how any investment will be spent is a key focus area when requesting Advanced Assurance from HMRC.
From the investor’s point of view, the process for claiming tax relief is quite straightforward, though there may be some planning opportunities to consider in order to achieve optimal tax benefits. The main difficulties around both schemes’ rests with the company and its ability to meet all the qualifying conditions.
It is the potentially substantial tax reliefs which will encourage investors to subscribe for the shares being issued by the qualifying company. A summary of the reliefs are set out below.
Companies that can use the scheme
There are numerous conditions that must be satisfied by the company and the importance of obtaining Advanced Assurance from HMRC must not be understated. A summary of the main conditions are included in the table of key differences below, in addition to which the company must be unquoted, have a UK tax presence and not be a subsidiary of another company. There must be a clear risk to the investor’s capital and the money raised must be used for a qualifying purpose, which is either:
- a qualifying trade (exclusions include commodities trading, legal/financial services, property development or property backed trades such as hotels, nursing homes etc. and passive activities such as hire/rental businesses)
- preparing to carry out a qualifying trade
- research and development that’s expected to lead to a qualifying trade
Key differences between EIS and SEIS
* Knowledge Intensive Companies are typically those with high research and development costs.
It is important to note that tax reliefs will be withheld or withdrawn from the investors if the company does not satisfy the conditions for at least 3 years after the investment is made.
With current interest rates causing an increase in the cost of borrowing, qualifying companies may have a greater appetite for these particular sources of finance. The legislation on these reliefs is complex, so if this is something that you would like more information on please do not hesitate to contact us.
Written August 2021 (Updated June 2023)