What are SEIS & EIS? The essential guide for UK startups
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) give investors a significant tax...
You’ve just launched your company: you’re busy working on your product, trying to gain traction, seeking feedback from early-stage users so you can refine the customer experience and your value proposition. You now need investors who will buy into your vision.
That’s where the Seed Enterprise Investment Scheme (SEIS) comes into play. As a seed-stage business, angel investors might see you as a high-risk investment – but with the tax relief benefits offered through SEIS they could be ready to take the plunge.
If you’re looking to raise under SEIS you can easily apply for SEIS Advance Assurance on SeedLegals. And if you have questions after reading this post, you can book a free chat with one of our experts.
In 2012, the UK government set up the Seed Enterprise Investment Scheme (SEIS) as an initiative to incentivise investment in small, seed-stage companies. By offering tax relief benefits to private investors who invest in these businesses, the aim was to stimulate the growth of the economy and encourage entrepreneurship.
The SEIS scheme has been very successful in its original aims. The most recent statistics from HMRC show that £175 million was raised under SEIS for 2,065 companies in the 2020 – 2021 tax year – that’s up 4% from 2019 to 2020.
Want to know who’s using SEIS to raise? The most common sector is Information and Communication (41%), followed by Professional, Scientific and Technical. And 68% of companies raising with SEIS are registered in London and the South East. (source: HMRC)
The main advantage of SEIS is the ability for your company to raise funds that would otherwise be hard to secure as a seed-stage business. If you’re eligible for SEIS (we discuss the eligibility criteria below) you can raise up to £150,000 in total under the scheme.
A further advantage of SEIS funding is that you aren’t prevented from using the money to repay any third party loans, as long as the loan isn’t connected to the SEIS investor. The loan must also have been taken out ‘for the purposes of trade’.
According to HMRC’s rules, the funds raised through SEIS shares must:
SEIS investors must be UK taxpayers to take advantage of the scheme. An individual investor can invest up to £100,000 under SEIS each tax year. They can’t be an employee of the company they’re investing in, but they can be a paid director.
SEIS investors qualify for these types of tax relief:
Tax relief can be carried back to the previous tax year, as long as the investor hasn’t already invested the maximum they’re allowed under SEIS in that year (£100,00 until 6 April 2023, £200,000 after that).
If you’re hoping to raise a round with investment from family and friends, it’s important to know that certain family members can’t claim SEIS tax relief if they’re closely involved with the company because they count as your ‘associates’.
‘Associates’ include spouses, civil partners, parents, and children – but not siblings. Associates don’t qualify for SEIS tax relief if they’re an employee of the company or they own more than 30% of the shares. There are full details on who’s excluded the gov.uk website.
Any SEIS investor must not hold more than 30% of the company’s overall shares. They’re also technically disqualified from liquidation preference, but there’s a workaround by using ‘A Ordinary Shares’ – as we’ve explained in our post about liquidation preference. If an investor specifically requests this, you can grant these SEIS-compliant A Ordinary Shares. SeedLegals makes this super easy to do – to ask us about this, hit the chat button.
If you want to attract investors through SEIS, you’ll need to start by checking that your company is eligible for the scheme.
First, make sure your business activities don’t fall under one of HMRC’s excluded trades. These include:
For the full list of excluded trades, check HMRC’s list.
If you’re worried that some of your business activities might be excluded, the good news is that the excluded activities must be a ‘substantial’ proportion (more than 20%) of your overall activities to prevent you from qualifying from SEIS.
You might still be eligible if you’re supporting an excluded trade, for example, your app monitors electricity usage.
Your company must:
If your company is not UK-owned you might still qualify for SEIS. HMRC expects you to prove that you have a ‘permanent establishment’ in the UK. That is, you’ll need to demonstrate that your company has a fixed place of business in the UK or a UK-based agent who carries out work for you.
The risk to capital condition requires you to prove that:
This condition means you’ll have to perform a balancing act: you’ll need to convince HMRC that you pose a risk to investors at the same time as convincing investors that funding your company is a sound proposition.
So you’ve established that your company qualifies for SEIS funding and you want to tell investors about the exciting investment opportunity you can offer…
Hold your horses! If you’re going to convince investors to fund your enterprise, they will want to see some form of proof that their investments will be eligible for SEIS tax relief. That’s where Advance Assurance (AA) comes in.
AA is confirmation from HMRC that an investment in your company is likely to qualify for SEIS tax relief, assuming that:
The majority of potential investors (except perhaps your friends and family) will want to see confirmation of your AA before they’ll consider making an investment. That’s why it’s important to leave plenty of time – at least 1 to 2 months for HMRC to process your application – before you start offering SEIS investment opportunities.
With SeedLegals, applying for AA is simple. We do more than 60% of AA applications in the UK, with a 98% success rate (compared to the average of 62%). Read on to find out how to complete your application.
You can apply for Advanced Assurance with SeedLegals. Our combined expert support and automated workflow help to streamline the process. Our SEIS experts are with you every step of the way and can guide you through the process from start to finish – unlimited support is included at no extra cost. At the end of the process once your documents are finalised, we will also apply on your behalf on HMRC’s website. It’s free to sign up and get started.
Before you start, make sure you have your company’s UTR number on hand because you’ll need this for the application form. If you can’t find the UTR or you don’t think you received one when you registered your company, you can request a UTR from HMRC.
You’ll need to demonstrate that you fulfil the SEIS criteria. This includes:
You’ll also need these supporting documents:
When you apply through SeedLegals, our experts review all your documents to verify you have everything you need to successfully obtain your Advance Assurance.
In 2019, HMRC introduced an SEIS Advance Assurance Checklist which must be filled in and submitted along with the application form. The checklist is designed to make sure you’ve included all the right information so HMRC isn’t delayed in processing your application.
On SeedLegals, when you complete the application form and supply the supporting documents, we automatically fill in the checklist for you.
When your AA application has been approved, you’ll be able to approach more potential investors with confidence, knowing that their investment should qualify for SEIS tax relief.
One source of investment would be an SEIS investment fund which specialises in investing in seed-stage companies and small startups. You could also attend networking events for founders and angel investors, where you’ll hopefully find an investor enthusiastic about your company’s vision.
And don’t forget that friends and family can use SEIS to invest in you too – the usual investor restrictions apply (see above: SEIS for investors).
When you’ve found investors, finished your funding round, and issued your SEIS shares, you’ll then need to do SEIS compliance. As with applying for Advance Assurance, at SeedLegals we make this straightforward.
In a few simple steps, your investors get what they need to claim their SEIS tax relief. Here’s what to do:
Because SEIS is aimed at seed-stage businesses, if you’re successful in growing your company you might move on to fundraise through EIS, the Enterprise Investment Scheme.
What’s the difference between EIS and SEIS? Basically, EIS is the older sibling of SEIS. Both schemes give tax relief to investors who invest in small-to-medium startups. SEIS and EIS have similar rules and benefits for companies and investors, but EIS is for slightly larger companies and reflects the reduced risk for investors.
Here’s how the criteria for EIS compare to SEIS:
The main differences for EIS investors are:
If you want to raise extra money before a funding round, while making sure the investment is SEIS compliant, you can do that with our SeedFAST.
SeedFAST is an advance subscription agreement – it’s an SEIS-compliant way to take an investment before a funding round, and an alternative to a convertible note (see below: SEIS jargon buster).
Under a SeedFAST agreement, an investor can get SEIS tax relief as long as their funds are converted into SEIS shares (so their capital becomes ‘at risk’) within a year of you receiving the money.
It’s incredibly quick and simple to create a SeedFAST on SeedLegals – your document can be ready in minutes for your investor to sign. We call this agile fundraising – there’s nothing to stop you getting a top-up of capital when you need it.
A Ordinary Shares
These are Ordinary Shares with Liquidation Priority: they take advantage of a legal workaround so AO ‘A Ordinary’ shareholders can benefit from SEIS and get their money back first when the company is sold or goes into liquidation.
Confirmation from HMRC that a person investing in your company should qualify for SEIS tax relief.
To be eligible for SEIS, a company must have no more than £200,000 in ‘gross assets’. (From April 2023, it’s £350.000).
These assets include: fixed tangible items such as machinery, cash or another asset that can be converted into cash the same financial year, and intangible things with value such as intellectual property you’ve bought (but not your own patents).
A type of funding round ideal for seed-stage businesses. Usually it’s a first funding round consisting of investments from friends and family. You can do a Bootstrap Round on SeedLegals.
Or Convertible Loan Note, CLN for short. This agreement is a way to raise money between funding rounds. An investor loans money to your company under the agreement that you’ll either pay them back or give them shares instead of the loan amount at a pre-arranged milestone. Convertible Notes aren’t compatible with SEIS because the investor’s money is not put at sufficient risk. There’s more detail in our post about convertible loan notes.
Investors with liquidation preference get priority when a company is sold or liquidated, so they’re more likely to get their money back compared to other investors without this preference. Read more in our post about SEIS-compatible liquidation preference shares.
Permanent Establishment Test
To qualify for SEIS, a non-UK company must prove that it has a ‘permanent establishment’ in the UK. This means: either a fixed place of business in the UK through which the company’s business is partly/wholly carried out, or a UK-based agent with the authority to act for or enter contracts on behalf of the company.
In your Advance Assurance application, you must tell HMRC the date your company started trading. To work this out, use HMRC’s analogy of a shop: if you have some products on your shelves and you’ve turned the shop sign to ‘open’, then you’ve started trading: ‘undertaking activities with a view to making a profit’) – even if no customers come in.
We’re SEIS specialists – we’ve helped thousands of startups get their Advance Assurance. To get started, book a free call with one of our experts: