Exploring EIS and SEIS Tax Incentives - dummies

Exploring EIS and SEIS Tax Incentives

By Helene Panzarino

Luckily for entrepreneurs looking to raise funding for their businesses, the UK enjoys very attractive tax incentive schemes for equity investors, making it that much easier for investors to see some of the practical benefits to getting on board.

It’s obvious to most that investing in a smaller company carries more financial risk than investing in a larger business, and correspondingly, an investment in a small business carries great potential rewards. The UK government tries to help keep the investment flowing into these companies via two Established by the Chancellor in 1994, initially with tax-incentive schemes – the EIS (Enterprise Investment Scheme), and further extended to SEIS (Seed Enterprise Investment Scheme). Both in 2012, both tax incentive schemes are very popular with entrepreneurs and investors.

Certain types of businesses don’t qualify for SEIS or EIS investment, and these businesses include those providing legal or accountancy services; those dealing in land or property development; businesses dealing in commodities, futures, shares, securities and other financial activities; those whose focus is on leasing, including hiring of assets, energy generation, and so on.

It’s obvious to most that investing in smaller companies carries more financial risk, and correspondingly, great potential rewards, and the UK government tries to help keep the investment flowing into these companies via the schemes. SEIS and EIS funds are managed by professional fund managers. SEIS and EIS networks and crowdfunding sites club together to source investments and co-invest, which also adds to the pool of potential investors.

As with all things financial, it’s best to seek professionally qualified advice before embarking on either of these schemes. If your accountant is a qualified chartered accountant, she may also be a person to consult. For information on the process, forms, criteria and timings of the schemes, you can also look at the government’s Seed Enterprise Investment Scheme page (or ) and HMRC‘s (Her Majesty’s Revenue & Customs) website for information and guidance on accessing the schemes.

SEIS and business funding

EIS, the first of the two initiatives, was originally set up to encourage individual investors to invest in smaller businesses, to help stimulate the economy, and indeed individuals do still utilise the schemes. What’s changed from the early days is that you now have SEIS and EIS funds, managed by professional fund managers, and SEIS and EIS networks and crowdfunding sites, who club together to source investments and co-invest also adding to the pool of potential investors.

As two of the most popular tax initiatives offered to UK tax payers by the UK government, some points to consider when thinking about using them to fund your high growth or innovative business include:

  • SEIS, the (Seed Enterprise Investment Scheme, offers tax incentives to those who invest in)

  • Suitable for early- stage companiesy (less than two years old) investments with unlisted shares (share not quoted on a major stock market.) shares Most companies that use SEIS go on to use the EIS tax-incentive scheme. Points to keep in mind about SEIS include

  • The company needs to have 50 or fewer staff members, and gross assets (all the assets which would be shown on a balance sheet) of a maximum of £200,000 before the investment.

  • A company can receive up to £150,000 of investment under the scheme.

  • Individual investors can invest up to £100,000 per year.

  • Investors annum, but they cannot be employed by the company.

  • Income tax relief to investor at 50 per cent of the cost of shares subscribed for, assuming the investor has to pay y have tax to pay.

  • Dividends paid on SEIS shares are subject to tax.

A simple SEIS example of how SEIS works: A:

An individual investor earning £155,000 in taxable earnings during 2014/2015 is will be liable for approximately £55,880 in income tax for the year. An investment of £100,000 in an SEIS company would generates a tax savings of £50,000 against that tax liability, leaving a net income tax bill of approximately £5,880. (Source: Vipul Somaiya at www.taxplusaccountants.com.)

This example has no regulatory status and provides an overview only. It should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained where necessary.

EIS and business funding

EIS, the Enterprise Investment Scheme, was established in 1994 to encourage individual investors to invest in small businesses in order to help stimulate the economy, and individuals still utilise the scheme today. Highlights of EIS include

  • A company needs to have 250 employees or fewer and maximum gross assets of less than £16 million.

  • Income tax relief to the investor is at 30 per cent of the amount invested in new shares.

  • Individual investors can invest up to £1 million per year with annum, but there is no minimum investment amount.

  • As with SEIS, the investor must not have a substantial interest in the company.

  • A qualifying company can receive up to £5 million.

  • Dividends paid on EIS shares are subject to tax.

EIS practical example

To makes the maths easy in this example, assume an EIS investor invests £10,000 and is in the 45 per cent tax bracket. If the company does well and doubles in value, and the investor holds her shares for three years, her income tax relief would be £3,000. If she sells the shares after three years, capital gains tax relief would be £0. In this scenario, the investor would gain £10,000 profit from the sale of the shares, plus his £3,000 in income tax relief for a total of £13,000. (Source: Vipul Somaiya at www.taxplusaccountants.com.)

Disclaimer: this example has no regulatory status and provides an overview. It should not be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained where necessary.

Certain types of businesses don’t qualify for SEIS or EIS investment, and these include providing legal or accountancy services, dealing in land or property development, dealing in commodities, futures, shares, securities and other financial activities, leasing, including hire of assets, energy generation, and so on.

As with all things financial, it’s best to seek professionally qualified advice before embarking on either of these schemes. If your accountant is a qualified chartered accountant, he may also be a person to consult.