SEIS And EIS Investment Schemes – Legal Requirements
This scheme is designed to encourage private investors to invest in small businesses by providing tax incentives to the investor in doing so. The maximum amount that can be invested is £100,000 in a tax year, and £150,000 in total under the scheme. Investors can receive up to 50% tax relief in the tax year the investment is made.
If you think potential investors might be eligible for SEIS relief by investing in your business, check out whether your company meets the legal requirements below:
Legal Requirements For SEIS Relief:
We have put together a checklist of considerations for whether an investment is eligible for SEIS relief:
Your company must:
- either be based in the UK, or have a permanent establishment in the UK
- be less than two years old
- have less than £200,000 in assets
- Spend all the money received within three years of the investment on a qualifying trade activity
- If it has subsidiaries, controls more than 50% of the subsidiary, and the subsidiary cannot be controlled by another company
AND… it must NOT
- be listed on any recognised stock exchange
- have more than 25 employees (if the company is the parent of a group of companies, this requirement applies for the whole group)
- trade in one of the scheme’s ‘excluded activities’ – generally these include finance, investment, property business, and others listed here.
- be controlled by another company or a person
- be in a partnership with another company
use the money invested for payment of dividends to shareholders
- control another company which is not a qualifying subsidiary
The Enterprise Investment Scheme (EIS) is designed to support higher risk companies in attracting investment by offering tax incentives to potential investors who purchase shares. Compared to the SEIS scheme, the EIS is aimed at larger companies with greater returns on investment. The tax relief available to investors on this scheme is 30% of the purchased shares up to a maximum of £1 million invested in such shares that can be claimed by the investor. An investor is limited to £5 million investment under any schemes (EIS, SEIS and Venture Capital Trusts as well as any other State Aid investment or scheme covered by the European Commission).
More than £8.6 billion has been poured into the EIS scheme since its inception.
Legal requirements for EIS relief:
We have put together a checklist of considerations for whether an investment is eligible for EIS relief:
The COMPANY must:
- have fewer than 250 full-time employees at the time of share issue
- within two years of the share issue, employ the money raised by the share
- issue for the purposes of trade or research and development
The COMPANY must NOT:
- be listed on a recognised stock exchange;
- control any other company, if it is not a qualified subsidiary. The company may have subsidiaries, but it must control more than 50% of the subsidiary, and the subsidiary cannot be controlled by another company;
- be controlled by any other company;
- have gross assets exceeding £15 million immediately before any share issue and £16 million immediately after that issue. This includes the assets of a whole group if the company is a parent company;
- trade in ‘excluded trading activities’, a list of which can be found here. A company may have some excluded activities, but they should constitute no more than 20% of the company’s total activities.
The SHARES must be:
- ordinary full-risk shares and cannot carry preferential rights to shareholders in the event of winding up the company
- paid in full
The INVESTOR must NOT:
- be connected to the investee company. “Connection” means if the investor controls the company or holds more than 30% of the share capital or voting rights, or if the investor is a partner, director, or employee of the company, unless they are a Business Angel (a director who receives no remuneration).
As a founder of my own startup, it was refreshing to work with people who truly understood my business’ needs. I didn’t go to law school but I’d like to think after the Startup Legal Session and the consultations that I understand my business’ legal needs quite well! It’s only been six months since we launched, but already I know that I’m so happy I got these documents from Linkilaw!
Mauria, CEO, I AM LDN
“The Enterprise Investment Scheme can provide very attractive income tax and capital gains tax relief for individual investors in small and unquoted trading companies.”
– Mulligan Williams Ltd
Increase Your Desirability For Investment: Planning For EIS And SEIS Relief
Planning for EIS and SEIS Relief: Advance Assurance.
Normally EIS and SEIS relief is applied for and granted after the investment has been made. However, to make themselves more attractive to potential investors, companies considering using the EIS or SEIS scheme can make an application to HMRC for an ‘advance assurance’. This is a provisional approval of the company stating that the company meets the requirements of the schemes, namely that:
- it is a qualifying company;
- the shares to be issued are eligible shares;
- the shares will be issued to raise money for a qualifying business activity;
- and the money raised is to be employed only by companies which satisfy the rules of the schemes.
Planning for EIS and SEIS Relief: To increase your company’s desirability for obtaining funding from investors looking to gain EIS or SEIS relief, you should also try to have the following in place:
- a registered company under UK law
- signed shareholders agreement
- director’s service agreements with any directors
- employment contracts with employees
- a website which complies with privacy and data protection obligations
- full ownership of IP rights
Linkilaw has a panel of lawyers able to assist companies with the planning and preparation for EIS and SEIS relief, including making an application for Advanced Assurance from HMRC and preparing the necessary documentation to attract potential investors seeking EIS and SEIS relief.
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