Is SEIS and EIS right for my small business?

Raising cash as a fledgling business can be tough, but government-backed venture capital schemes can help. But what are the SEIS and EIS initiatives, how do they work and when you can apply for them? We explain what you need to know.

What are the SEIS and EIS schemes?

The SEIS and EIS are government-backed schemes that encourage individuals to invest in businesses in return for attractive tax advantages.

The two schemes have slightly different limits, but both can be a valuable way for companies to secure funding. They can be great options for accessing finance, particularly as many banks are tightening lending conditions.

The SEIS is aimed at fledging companies that have been operating for less than two years and are just starting to trade. The EIS, on the other hand, is designed to help small businesses grow.

SEIS

Businesses that successfully use the SEIS will attract funding of up to a maximum of £250,000. The government says this sum includes any de minimis state funding within the three-year period and also counts towards the limits for any future venture capital schemes you might use, such as the EIS. De minimis is a Latin term used to refer to an EU regulation that caps the amount of aid that businesses can get from the government or the EU. It is defined as small amounts of aid that do not have any effect on trade between EU member states and that do not distort or threaten to distort competition. You can find out more about de minimis funding here.

As with many investment schemes, investors who fund your business through the SEIS receive shares in your company. However, you need to follow strict rules to ensure that they get the tax relief benefits to which they are entitled. You must remain compliant for three years after the investment, or their reliefs will be withdrawn.

The money you raise through the SEIS must be spent within three years.

EIS

Issuing shares through the EIS is very similar to the SEIS, but the eligibility rules are different. Your company still needs to be relatively young, usually with its first commercial sale being less than seven years ago.

Typically, the most you can raise in any 12-month period is £5 million, and you are limited to funding worth £12 million through the entire lifetime of your business. 

However, if you have what the government calls a ‘knowledge-intensive company’ that carries out significant amounts of research, development or innovation, you might be able to access higher limits. This might also mean you’re allowed to apply more than seven years after your first trade.

Just like with the SEIS, you’ll need to follow certain rules for three years after each investment, or your investors could have their tax relief withdrawn or withheld. 

The money you raise must be spent within two years.

The differences between SEIS and EIS

This table describes some of the key differences between the two schemes.

Who is eligible for SEIS and EIS?

Before applying for either scheme, you need to check that your company is allowed to use it, that you will meet the conditions, and that your plans for the money are compliant. 

Any business applying for either scheme must:

• Have a permanent establishment in the UK

• Carry out a trade that qualifies

• Plan to spend the investment on a qualifying trade

• Not be listed on a recognised stock exchange at the time of investment

• Not be controlled by another company

You also need to meet the specific qualifying conditions for whichever scheme you choose to apply for.

The government says that most trades will qualify, but that there are specific exclusions of which you should be aware. For instance, your business may not be eligible if more than 20% of your trade consists of:

• Coal or steel production

• Farming

• Leasing

• Legal, insurance, financial, banking, or debt services

• Running a hotel or nursing home

• Property development

• Generation, production or exportation of energy, gas or fuel

There is a comprehensive list of trades that do not qualify, which can be found here.

You also need to ensure that the company meets the ‘risk to capital’ condition. This essentially means two things.

First, your company must aim to grow and develop its trade long term. For instance, you can’t intend to stop trading after a set number of projects. The growth and development of your company must be intended to be permanent and cannot rely on continued support from investors.

Second, the investment should be a risk to the investors’ capital. That means that there must be a risk that the investor could lose more money than they are likely to gain. It also means you can’t put safeguards in place that:

• Give EIS and SEIS investors priority over other investors

• Allow investors through the scheme to withdraw their money as soon as possible

• Protect EIS and SEIS investors’ money by using other investors’ money first

There are other rules around issuing shares, which are detailed on the GOV.UK website. These include rules around dividends and how shares are paid for (and when).

What can you do with the money raised?

Any money raised through either scheme must be used for either a qualifying trade (as detailed above), preparing to carry out a qualifying trade or R&D that is expected to lead to a qualifying trade.

What is advance assurance?

You can apply for advance assurance, which will tell you whether your proposal for raising capital is likely to meet the qualifying criteria. 

HMRC will tell you whether an investment would meet the conditions of whichever venture capital scheme you plan to choose.

An application can be made by a company secretary, director, trustee of a charitable trust or a third-party agent.

You will need to provide details of how much you plan to raise, what you intend to spend it on, and information about potential investors. You’ll also need to explicitly state how the money will help with growth and development and show that you meet the ‘risk to capital’ requirement.

You can apply here.