The UK government is wonderfully startup-friendly with a fine range of tax reduction, R&D cashback and other schemes that help startups, founders and investors.
The EIS and SEIS schemes are key for your early stage startup. These allow UK taxpaying investors to claim a 30% or 50% deduction on their taxable income on their investment in your company, and greatly reduces the amount of risk they are taking when backing you.
Eligibility (compliance) for EIS / SEIS is often part of an investor's investment criteria, meaning that they would not consider investing in your business unless you qualify for one or either of these schemes.
In the UK around 70% of investments in early stage startups are made using the EIS/SEIS scheme. So, by structuring your company and potential investment to be SEIS or EIS compliant, you greatly increase the appeal to high net worth individual investors, and hence make it potentially dramatically easier to get funded.
Making Sure You're Compliant
You can apply to HMRC for a certificate saying you’re compliant, but for an early-stage startup, provided you haven’t done anything highly non-standard, you should be able to achieve compliance, and that certificate isn’t going to add much value, other than investors sometimes asking for it before making an investment.
While SEIS / EIS compliance is pretty straightforward – there are a couple of gotchas to look out for.
- It’s critically important that investors make their investment in your company before you assign them their shares – a seemingly insignificant detail that can cost them thousands and spoil a beautiful relationship.
- Make sure that their investments aren’t in any way construable as loans, which will make them invalid for SEIS / EIS relief.
Whereas there are a larger number of contingencies we've outlined the main criteria as a quick overview for you below.
In addition, the SeedLegals document builders are designed with EIS / SEIS compliance in mind, and actually flag up any potential issues in your contracts as you create them.
Make sure your company:
- has not been actively trading for more than 7 years
- has fewer than 250 employees at the time of investment
- is not under the control of another company
- Is not listed on the stock exchange (except AIM)
- does not have gross assets of more than £15m immediately pre-investment and £16m immediately afterwards
Make sure your company:
- has fewer than 25 full-time employees
- has gross assets of less than £200,000 at the time of the SEIS investment
- has been not been operating for more than 2 years