EIS Versus SEIS: What’s the Difference

 In Small Business Accounting

The EIS and SEIS represent a great selling point for any business attracting investment, but not as many are taking advantage of it as they could.

The UK economy relies on a thriving start-up environment, but times are tough. Entrepreneurs and small business owners say they are finding it harder to attract capital and confidence among SMEs recently hit a four year low. New businesses are being started at a record rate but investors are more reluctant to part with their money.

With the looming prospect of Brexit casting a shadow of uncertainty over everything, the Government is keen to encourage greater levels of investment. One of the most generous measures they have put in place is EIS and SEIS. These can be a great selling point for potential investors, but many businesses are not making the most of them.

That may stem from confusion about how they work and the difference between the two. In simple terms, both share a goal of encouraging investment in businesses but while EIS focuses on more mature SMEs, SEIS is for early stage enterprises. Let’s look at those in closer detail.

EIS

First off the mark was the Enterprise Investment Scheme. It works well for sophisticated and larger scale investors and offers 30% tax relief on anything they invest and hold for three years. After that time, they are exempt from capital gains tax.

Every year investors can invest up to a maximum of £1m every tax year and a lifetime cap of £12 million or £20 million if the company can be described as being ‘knowledge intensive.’

The scheme is designed to encourage greater investment into unlisted companies. In order to qualify, the business must not have been operating for more than seven years, have less than £15 million assets and employ fewer than 250 people.

SEIS

In 2012, EIS got a little brother, the Seed Enterprise Investment Scheme. This was designed to support the early stage businesses which would normally be viewed as too high a risk for all but the most enterprising of investors.

A business must have been operating for a maximum of two years, have assets of no more than £200,000 and employ fewer than 25 people.

It is slightly more generous, offering 50% tax relief against the amount invested and it also has capital gains tax exemption for any gains from the sale of your shares if the investor has held them for more than three years. CGT also has a 50% write-off of the investment in the same tax year. Investors can expect tax relief benefits of up to £100,000 each with a lifetime cap of £150,000. All these shares will also generally be free of inheritance tax as long as they are held for an initial period of more than two years. Part or all of the investment can also be carried back in the year before they invested.

SEIS also has a four month or 70% rule about applying for full clearance. This means your start-up must have traded for at least four months or spent 70% of the investment raised.

Updating rules

The landscape on SEIS and EIS has been shifting in the last few years as the Government refines its approach to both in an attempt to ensure money is channelled in the right direction. There were changes to EIS in both the 2017 and 2018 budgets and these have had an impact on the market. The latest EIS Industry report states that these rules have refocused EIS towards its original purpose to support businesses which were offering growth. It is now being seen as a growth-based investment rather than just a form of tax relief.

Making the most of it

All this adds to the sense of complexity and uncertainty surrounding the SEIS and EIS. The rules have been changing and may well continue to do so. Even so, this is a great tool for any business looking to attract capital. Demand is already high. In 2016-2017 3,470 companies raised 1.8bn of funds under EIS. Investors are increasingly waking up to the potential it offers and a host of new funds are springing up offering investors various ways to invest in EIS and SEIS registered companies.

It appeals to those investors who would have liked to take a chance with a high-risk investment in an exciting early stage business but would previously have felt the risks outweighed the returns. A host of new funds are opening up offering investors the chance to get involved with EIS and SEIS firms. The Government is also refining its approach to ensure the money is getting where it’s intended.

The demand, then, is there. The opportunity is there and in a world in which smaller enterprises find it difficult to attract capital every little advantage helps. As a start-up, therefore, it pays to understand whether you qualify for EIS or SEIS and, if so, what you’ll have to do to apply.

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