4th October 2018

SEIS and EIS: The investment schemes supporting big ideas

Burn rate, bootstrapping and pivots: Starting up a business is a journey often defined by uncertainty and risk. Money - that is, investment - is the leading worry.

Forging a new path and doing pioneering work is expensive. Often startups have to run the gauntlet to get the investment they need. Success is far from certain, so how can you get investment backing when there are safer, albeit potentially less lucrative bets out there?

It’s here where EIS and SEIS come to the rescue. The Enterprise Investment Scheme and the Seed Enterprise Investment Scheme help innovative businesses get investment by lessening the financial risks posed to investors.

Essentially, it’s a tax break for investors. They get generous reliefs for buying shares in innovative businesses. In return for these reliefs, the investor has to hold onto the shares for a minimum of three years, to ensure the investment is ‘patient’ (i.e. not just a cut-and-run money grab).

For you, both schemes can provide the runway needed to chase your vision. SEIS, in particular, is very generous since it’s meant to encourage investment in the youngest, least developed (and perhaps most risky) startups. It is, as the name suggests, for the purpose of securing seed funding.

To access SEIS, your company needs to conform to a few size requirements. Your gross assets must be under £200,000, your headcount less than 25 employees and the funding round is capped at £150,000.

The funding pathway doesn’t stop with SEIS, though. EIS is actually the older, more established of the incentives. It also provides lucrative - albeit less lucrative - tax breaks to potential investors. But it makes up for being less generous by enabling larger businesses to raise more money: up to £12m per company.

There are compliance requirements to consider, but both schemes offer a ready source of investment for the UK’s most innovative businesses. As long your business is UK-based, conforms to the size requirements of SEIS/EIS, not part of an excluded trade and wants to grow and develop in the long term, your business is likely eligible.

That said, HMRC has added two new requirements to the application process, making things a bit more complicated. These are the risk to capital requirement and the inclusion of investor information to get HMRC’s pre-approval for SEIS/EIS eligibility.

The risk to capital requirement came into effect for shares issued on or after 15 March 2018. The condition states that a SEIS/EIS eligible investment must carry a significant risk that the investor will lose money.

Essentially, the rule is designed to eliminate property based or low risk structured investments. HMRC is targeting investments that seek to limit the commercial risk for investors, whilst preserving the tax relief. Genuinely entrepreneurial businesses don’t have to worry too much.

Of more immediate concern to startups are the extra requirements added to the HMRC pre-approval process. Pre-approval - or ‘advanced assurance’ as HMRC calls it - is a critical step in SEIS/EIS funding. It’s a process where HMRC checks that your share issue will meet the SEIS or EIS’ qualifying conditions. Many investors will want advanced assurance before committing money.

The change is that HMRC now require details of the proposed investors before granting advanced assurance. This is to cut down on the amount of business applying for pre-approval but then not raising any investment.

For startups, it creates a chicken and egg challenge: HMRC wants investor details to grant advance assurance - and investors want advanced assurance before committing. It’s not insurmountable, however and a relevant expert can help you navigate this pitfall.

Neither of the two new conditions should dissuade you from pursuing SEIS and EIS as potential funding sources. The rules have been added to ensure that its only disruptors and innovators that benefit from SEIS/EIS. Rather than investors investing in ‘safe’ companies.

The schemes reward risk taking and HMRC want investors to back companies that could potentially blossom into the next unicorn. So if you’ve got a big idea and you need investment, there’s no better place to start.

Get in touch with the experts at Propel for support and advice on applying for either the Enterprise Investment Scheme or the Seed Enterprise Investment Scheme.

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