EIS rules and benefits for investors explained
Invest in EIS-eligible companies to get generous tax relief. We set out the rules and benefits for investors.
Most trades do qualify for SEIS and EIS funding, but a number are excluded from the schemes entirely. Excluded trades include those dealing in land or commodities, those involved with banking, insurance or money-lending, those providing legal or accountancy services, those involved in property development and those generating and exporting electricity.
Although HMRC have provided an exhaustive list of excluded activities, not all businesses fit perfectly into each category – there will inevitably be some grey areas that may need further analysis. A useful point to note is that companies are only excluded from raising money under SEIS and EIS, if a ‘substantial’ element (+20%) of their trade activity consists of the excluded activity.
There are also a number of eligibility criteria listed below which must be satisfied before you can confidently apply for SEIS/EIS Advance Assurance and offer your investors tax relief. In addition to these, check out a number of lesser known ways companies can qualify for SEIS/EIS.
The Gross Assets Test
A company looking to secure SEIS investment must have under £350,000 in gross assets pre-money (before April 2023, the limit was £200,000), whilst those looking to secure EIS investment must have less than £15 million in gross assets pre-money.
The Number of Employees Test
A company looking to secure SEIS investment must have no more than 25 employees, whilst those looking to secure EIS investment must have no more than 250 employees.
The Trading Time Test
To be eligible for SEIS funding, a company must have been trading for less than 3 years (before April 2023, the limit was 2 years). It should be noted that the date when a company starts trading is different to the date of incorporation detailed on Companies House. When establishing whether this test has been satisfied, HMRC will review the company’s profit and loss accounts rather than the date of incorporation.
UK Permanent Establishment Test
In order to raise funds under SEIS and EIS, a company does not necessarily need be a UK company in order to qualify. A foreign company can have a permanent establishment in the UK, through which a substantial part of the company’s business is conducted. In certain circumstances, having an employee based in the UK may satisfy the permanent establishment test although this should be assessed on a case by case basis.
The Partnership Test
The company looking to raise funds under SEIS or EIS must not be a member of a partnership with another company, as this will be flagged by HMRC.
Still not sure if your business qualifies?
If you’re still unsure whether your company qualifies, hit the chat button to talk to one SeedLegals SEIS/EIS experts.