EIS is here to stay (for the next 10 years at least)

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer valuable tax relief for private individuals looking to invest in young trading companies. The more generous SEIS is targeted at very early-stage companies, while EIS is aimed at slightly older and larger companies.

For founders planning to raise funds to aid their company’s growth, ensuring your company meets the qualifying conditions for EIS or SEIS may substantially increase your chances of attracting investors. S/EIS effectively reduces the net cost of investment and consequently de-risks/ improves the risk v return calculations of the investee. (In some of our communications with HMRC we have argued, and they appear to have accepted, that the availability of EIS can reduce the cost of investment by 25 to 30%).

The extension

As a form of notified state aid, EIS and Venture Capital Trust (VCT) relief was required to be notified to the European Commission while the UK remained part of the EU. SEIS relief was not subject to the same rules due to the smaller investment amounts it can cover. EIS and VCT were also subject to a sunset clause of 6 April 2025, after which relief would no longer be available, unless extended. The government announced last year its intention to extend EIS and VCT by a further 10 years. On 3 September 2024 the extension came into force, extending the availability of EIS and VCT reliefs until April 2035.

It’s great to see the importance of start-ups being recognised in growing our economy and ensuring that the UK remains a world leader in entrepreneurship. We are proud members of the Enterprise Investment Scheme Association, who have been campaigning over many years to secure this 10 year extension.

Overview of the schemes

The EIS offers tax relief to individuals that invest in new shares in qualifying companies. Investors can invest up to £1 million per year, or £2 million per year if at least £1million is invested into more R&D heavy, knowledge-intensive companies.

VCTs are companies listed on the UK’s stock exchange that invest in early-stage trading companies on behalf of people. This enables individuals to invest up to £200,000 per year in new VCT shares. Dividends received from VCT’s are also tax-free.

According to the UK government’s figures, together, the EIS and VCT schemes have leveraged over £41 billion of investment over the past 30 years.

A focus on EIS and SEIS

Our tax specialists at PKF Francis Clark have extensive experience in advising clients on EIS and SEIS.

We can assist you in understanding whether your company meets the qualifying conditions to raise funds under SEIS and/or EIS. We can also help you with the compliance process, allowing your investors to claim relief.

As noted above, EIS and SEIS are generous government schemes encouraging equity investment in new businesses by providing investors with significant income tax and capital gains tax reliefs on their investments. More information can be found here.

Conditions and compliance checks

It should be noted that the conditions for SEIS and EIS relief are tightly drawn and HMRC will check carefully that companies meet the qualifying conditions for relief. HMRC have stepped up their compliance checks over the past year or so, with additional questions asked by HMRC in roughly half of submissions.

Companies will need to be able to demonstrate the need for funding through a business plan and a detailed cashflow forecast. Any errors made by companies can prevent investments from qualifying for SEIS and EIS relief, for example issuing shares in advance of receiving investment funds into a company bank account. HMRC may request supporting documents such as bank statements to confirm that the conditions for SEIS or EIS relief have been met, so it is crucial to get this right before shares are issued.

Our tax specialists can advise you on the pitfalls to avoid and review areas of risk such as your business plan and articles of association, helping to avoid mistakes in applications and potentially the time and costs of dealing with multiple rounds of correspondence with HMRC

If you are a company looking to raise early-stage equity

If you are a company looking to raise early-stage equity and would like to explore the possibility of SEIS and/or EIS, then please do not hesitate to contact me or one of my colleagues in the share schemes team.