If your goal is to expand your business through new products or services you may need financial help – and a way to do that is through Enterprise Investment Schemes (EIS).
Many business owners are unaware of the UK government’s EIS and SEIS schemes. But these programmes can help attract investors to give your company financial backing through generous tax reliefs. But be aware that this is only for investors who hold fewer than 30% of your company’s total shares!
It means that investors can claim tax relief of up to £1 million per tax year or £2 million for ‘knowledge-intensive’ companies. These are usually technology and biotech firms.
So, will the Enterprise Investment Schemes help achieve business goals?
What are the Enterprise Investment Schemes?
There are two government enterprise initiatives that are available to small UK businesses for investment. They are similar but one is aimed at new businesses and others for those that are more established.
The Enterprise Investment Scheme is for established companies, whilst the Seed Enterprise Investment Scheme (or SEIS) is aimed at startups. Both aim to offer tax incentives to reduce financial risk to investors. This should help make the business a more attractive investment opportunity.
The EIS is designed to encourage investment for SMEs that are fewer than seven years from their first commercial sale or seven years from a previous ‘relevant investment’. Such businesses should have gross assets of less than £15 million and fewer than 250 employees.
Eligible investors can benefit from EIS through:
- Income tax relief of up to 30% on investments up to £1 million (£2 million for knowledge-intensive firms).
- Capital Gains Tax gains are free if the investment is held for at least three years.
- All Capital Gains Tax can be deferred if the gain is reinvested in EUS-qualifying shares
- If the investor makes a loss on shares they dispose of, they can elect that the loss is set against any income tax of that or the previous year.
There is no minimum investment through EIS.
What is SEIS?
Early-stage startups might be able to access the SEIS. The business must be less than three years old and have less than £350,000 in gross assets and fewer than 25 employees.
This scheme offers investors higher Income Tax Relief of 50%. The government hopes that offering higher tax relief will help newer businesses.
Companies can raise up to £250,000 with the gross limit set at £350,000. Capital raised must be spent on expenses to help the company grow, such as marketing or new equipment. Or, it can be used on research and development if it enhances the potential for growth. For example, by developing a new product or service.
How can Enterprise Investment Scheme help achieve business goals?
There are numerous ways that either the EIS or SEIS schemes can help achieve your business goals.
It helps encourage investors
Businesses need regular investment to keep growing. And while owners and company directors often plough funds into their business, extra investment is often necessary. These schemes allow investors to claim back between 30-50% of investment through income tax relief. This should encourage more investors take a chance on your company. In theory, this should make raising funds easier and increases the chance of securing capital.
You secure long-term investment
The schemes require investors to hold shares for at least three years to fully qualify for tax reliefs. That means you can secure long-term funding, which is better for achieving business goals because you aren’t dealing with investors who want a quick exit.
It helps raise more money
Businesses can raise up to £12 million through EIS funding, with a £5 million maximum in any 12-month period. Knowledge-intensive companies can raise up to £20 million.
You don’t need to make repayments
If you were to take out a bank loan for investment, you’d need to pay back the amount plus interest. But EIS funding doesn’t require repayments. Your investors will receive equity through shares in your business. This can help cash flow for growth rather than you thinking about debt repayments.
Qualifying for EIS
Businesses must meet eligibility criteria from HMRC to qualify for EIS. This includes:
- Fewer than 250 employees (or 500 for tech and other knowledge-intensive companies)
- Be based in the UK and be independent
- Have gross assets of less than £15 million before investment is made
- Use funds for development and growth
- Be a trade that qualifies for EIS (property, banking and legal services are excluded)
Qualifying for SEIS
Although similar in idea, the SEIS criteria are different. The company must
- Be established in the UK
- Have traded for fewer than three years
- Have gross assets not exceeding £350,000 before investment is made
- Not be listed on any recognised stock exchange
- Already be a corporation and not controlled by another company
- Not be part of a partnership
- Have not received investment through the EIS or from a venture capital trust
What should I do next?
As you can see, there are a range of criteria to qualify for the schemes. If you would like to know more about Enterprise Investment Schemes and whether the EIS or SEIS can help you achieve your business goals, then contact our experienced team today.
Other business grants and schemes are also available to business owners. We looked at these last year in a previous blog post.
