SEIS and EIS for Start-ups – Getting it right

4 minutes reading time

Raising capital is an important, but often daunting and difficult, task for entrepreneurs who are just starting out in a new business venture.

Private investment can be an effective alternative way of raising capital than debt and businesses can benefit from not only the investor’s money, but also their expertise.

However, private investors can be deterred by the level of risk involved in investing in small businesses, especially early stage businesses.

This is where the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) (together, the Schemes) come in.

What are SEIS and EIS?

The Schemes are government backed, tax incentivised schemes which aim to incentivise investors to invest in start-ups and early stage businesses.

Under the Schemes, investors can invest up to £1,000,000 (EIS) or £100,000 (SEIS) in each tax year, in return for equity.

Both schemes carry generous tax advantages, including:

  • Income tax reliefs to investments; under the EIS, investors can be provided with up to 30% of their investment back in income tax relief, whilst SEIS offers up to 50% income tax relief.
  • Exemption from capital gains tax (CGT) arising on disposals of shares acquired under the Schemes, provided certain criteria have been met (including that the shares have been held for at least 3 years).
  • If the shares are sold at a loss, then the loss can be offset against the investor’s other capital gains tax liabilities.

SEIS and EIS for Start-ups – Getting it right

Getting it right

Whilst the Schemes can provide a significant incentive for investors, and an effective means of raising capital for new businesses, the “sting in the tail” is that the Schemes have a lot of criteria to satisfy and can be difficult to get right.

The investor shares must be ordinary shares with no special rights (e.g. no preferential dividends) and the funds raised must be used for a “qualifying business activity” as prescribed by HMRC.

There are also other criteria to satisfy, including maximum employee limits (no more than 25 employees for SEIS and 250 employees for EIS) and gross asset tests (£200,000 for SEIS and £15m for EIS).

Legal and tax advice should be taken, and HMRC approval obtained in advance, to ensure that the business meets the strict criteria.

It is also crucial to ensure that the constitutional arrangements of the business are up to date, and reflect the intentions of the parties. A shareholders’ agreement and articles of association should be drawn up to address issues such as:

  • the management of the business;
  • anti-dilution and minority shareholder protections;
  • pre-emption rights on transfers of shares;
  • “drag along” and “tag along” rights; and
  • exit strategy.

It is crucial for investors and entrepreneurs alike to ensure that the relevant approvals and constitutional documents are in place to protect their respective investment and business interests.

How we can help

We have a specialist team of corporate lawyers who advise on all legal aspects of SEIS and EIS investment. If you wish to discuss any issues around SEIS or EIS, or if you require any other investment advice, please contact a member of our Corporate Commercial department to discuss.

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