Sep 09•Written By Heaton Vences

Small Business Owner’s Guide to EIS & SEIS

Small Business Owners Guide to EIS & SEIS: Maximising Growth with Investment Schemes

Running a small business is tough enough without worrying about where your next round of funding is coming from. That’s where the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) come in. These are government-backed initiatives designed to make it easier for small businesses like yours to attract investment by offering tax incentives to investors.

In simple terms, EIS and SEIS can make your business more appealing to investors. But what are they exactly, and how can they benefit your business? Let’s break it down.

The Basics of EIS & SEIS

Enterprise Investment Scheme (EIS):
Think of EIS as a way to sweeten the deal for investors looking at your business. It’s a government program that offers them tax relief when they invest in small and medium-sized enterprises (SMEs). Investors can get back 30% of their investment in income tax relief and might not have to pay capital gains tax on profits from their shares.

Seed Enterprise Investment Scheme (SEIS):
SEIS is like the little sibling of EIS, aimed specifically at startups and very early-stage companies. It’s even more attractive to investors, offering them 50% income tax relief and exemption from capital gains tax on the profits of shares sold. If you’re just getting started, SEIS could be the perfect way to get the funds you need to grow.

Why Should You Use EIS & SEIS?

  1. Attracting Investors:
    Let’s face it: getting investors to notice your business can be hard. EIS and SEIS give you an edge by reducing the risk for them. When investors know they can get significant tax breaks, they’re more likely to consider putting their money into your business.
  2. Boosting Your Credibility:
    Getting your business approved for EIS or SEIS isn’t just about the money. It also shows that your business is legitimate and has growth potential. This can make other investors and partners take you more seriously.
  3. Getting the Funds You Need:
    Whether you’re launching a new product, expanding your team, or just trying to keep the lights on, EIS and SEIS can help you secure the funds to make it happen.

Are You Eligible for EIS & SEIS?

Before you get too excited, you’ll need to check if your business is eligible. Here’s what you need to know:

EIS Eligibility:

  • Your company must not be listed on a recognised stock exchange.
  • You should have fewer than 250 full-time employees.
  • Your gross assets should be no more than £15 million before issuing shares.
  • Your business needs to engage in a qualifying trade (certain industries are excluded such as property development, hotels, farming, legal and accountancy services.

SEIS Eligibility:

  • Your company must not be listed on a recognised stock exchange.
  • You must have been trading for less than 3 years.
  • You should have fewer than 25 full-time employees.
  • Your gross assets should be no more than £200,000.

Investor Eligibility for EIS & SEIS

To make sure your investors can benefit from the tax reliefs under EIS and SEIS, they need to meet certain criteria. Here’s a quick rundown:

UK Taxpayer:
Investors must be UK taxpayers to claim the tax relief. If they aren’t liable for UK income tax, they won’t be able to take advantage of the benefits, even if they invest.

Investment Limits:
For EIS, investors can put in up to £1 million per tax year. For SEIS, the limit is £200,000 per tax year. These caps apply across all their EIS or SEIS investments, not just yours.

No Close Connections:
Investors can’t be closely connected to your company – they shouldn’t be employees, directors, or hold more than 30% of shares or voting rights. This rule ensures the reliefs go to new investors, not those already heavily involved in your business.

Hold Shares for Three Years:
Investors need to hold their shares for at least three years to keep their tax relief. Selling early might mean they have to pay some of it back, so this encourages them to stay invested long-term.

Claiming Relief:
After investing, investors need a compliance certificate (EIS3 or SEIS3) from your company to claim their tax relief. They’ll use this certificate when they file their self-assessment tax return.

Loss Relief:
If the investment doesn’t work out, investors can offset their losses against other income, reducing their overall financial risk.

By ensuring your investors meet these criteria, you help them maximise the benefits of investing in your business, making it a more attractive opportunity.

How to Get Started with EIS & SEIS

Getting started with EIS or SEIS isn’t as daunting as it might seem. Here’s a quick guide:

  1. Check Your Eligibility:
    First things first, make sure you tick all the boxes for either EIS or SEIS. This will save you time and effort down the road.
  2. Get Your Documents in Order:
    You’ll need a solid business plan, financial forecasts, and a clear idea of how you’ll use the funds. This paperwork isn’t just for the application, it’s also a crucial part of convincing investors to back you.
  3. Obtain Advance Assurance:
    This is like a pre-approval from HMRC, giving your investors confidence that your business qualifies for EIS or SEIS. It can make a big difference when you’re pitching to potential backers.

Common Challenges (and How to Handle Them)

Navigating EIS and SEIS can be tricky, but don’t worry—here’s how to handle some of the common hurdles:

  1. Understanding the Process:
    The application process can be a bit overwhelming. If you’re not sure where to start, get in touch. We can handle your Advance Assurance getting you investment ready, as well as the on-going compliance.
  2. Staying Compliant:
    Once you’re approved, it’s important to stay within the rules. Regularly check that your business activities align with the requirements of the scheme.
  3. Educating Your Investors:
    Some investors might not be aware of EIS and SEIS. Be prepared to walk them through the benefits and how it reduces their investment risk.

Wrapping It Up

EIS and SEIS are powerful tools that can help your small business secure the funding you need to grow. By understanding the benefits, checking your eligibility, and making a solid pitch to investors, you can use these schemes to take your business to the next level.

Remember, professional advice can be a game-changer in this process, helping you navigate the complexities and ensuring you get the most out of EIS and SEIS. Good luck, and here’s to your business’s growth!

Get in touch to see how we can help.