Finding funding as a start-up or small business can be difficult. That’s why government initiatives like the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) were created; to incentivise investors into investing in what would typically be seen as high-risk businesses.
In this blog, we discuss what SEIS and EIS are, how they differ from one another, and how to know which scheme is best suited to your business.
What are SEIS and EIS?
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government initiatives that aim to encourage private investment into small UK businesses and start-ups and support innovation and economic growth.
Start-ups use SEIS and EIS to attract investors and funding, which can be a challenge for businesses just starting out due to their limited trading history and lack of assets. Business eligibility is assessed by HMRC and, if approved, reduces investor risk by offering them attractive tax incentives.
The Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme is designed to support early-stage businesses and start-ups that have been trading for less than three years. Typically, SEIS is used by start-ups that are developing their first product, in their initial hiring stages, or starting to acquire customers.
Under SEIS, investors are able to invest up to £200,000 per tax year. In return, they receive benefits like a 50% income tax relief and no capital gains tax on profits if shares are held for three years.
As investing in early-stage businesses (like the ones eligible for SEIS) carries a greater risk, investor tax relief is higher than under the EIS. This makes investments in SEIS businesses particularly attractive.
The Enterprise Investment Scheme (EIS)
The EIS is aimed at medium-sized companies that are beyond the earliest start-up phase but have fewer than 250 full-time employees. Businesses often use the EIS when they are looking to scale their operations, expand their team, or enter new markets.
Businesses using the EIS can raise larger amounts than under the SEIS, and investors are allowed to invest up to £1 million per tax year. In return, they receive income tax relief of up to 30%.
SEIS vs EIS: What are the Key Differences?
Both the SEIS and EIS share the same goals, but target businesses at different stages of growth. While there are many similarities between them, there are also a number of key differences, which we have outlined below:
| SEIS | EIS | |
|---|---|---|
| Location | Permanently based in the UK | Permanently based in the UK |
| Maximum number of full-time staff members | 25 | 250 |
| Maximum gross assets | £350,000 | £15 million |
| Maximum trading age | 3 years | 7 years |
| Maximum individual investment per tax year | £200,000 | £1 million |
| Maximum investment per calendar year | N/A | £5 million |
| Maximum total investment | £250,000 | £12 million |
| Time limit for spending funds | Within 3 years of share issue | Within 2 years of investment |
| Tax relief for investors | 50% | 30% |
Please note: the EIS has slightly different criteria for Knowledge Intensive Companies (KICs).
Eligibility Criteria
Most types of start-ups and businesses are eligible for SEIS and/or EIS funding. However, there are some exceptions to be aware of.
For example, businesses where more than 20% of their trading activities involve excluded activities like banking, farming, insurance, and property development are not eligible for either scheme.
Find out more about the eligibility criteria for SEIS and EIS below:
What businesses are eligible for SEIS?
To be eligible for SEIS, businesses must:
- Be established in the UK
- Carry out a qualifying trade
- Have been trading for less than 3 years
- Own less than £350,000 in gross assets at the time of investment
- Have fewer than 25 full-time employees
- Not be a public company
- Not be trading on a recognised stock exchange
- Not be controlled by another company
- Not control another company other than qualifying subsidiaries
- Not have previously received EIS funding
What businesses are eligible for EIS?
To be eligible for EIS, businesses must:
- Be established in the UK
- Carry out a qualifying trade
- Have been trading for less than 7 years
- Have less than £15 million in gross assets at the time of investment
- Have fewer than 250 full-time employees
- Not be a public company
- Not be trading on a recognised stock exchange
- Not be controlled by another company
- Not control another company other than qualifying subsidiaries
Choosing Which Scheme is Right for Your Start-up Business
As eligibility for each scheme depends on a range of factors like the age, size, and funding history of your business, you don’t freely choose which scheme to apply for. However, it is important to understand how each scheme suits businesses differently:
- SEIS: The SEIS is usually best suited for start-ups in the early growth stages. This includes pre-revenue businesses or when businesses are going through initial market testing processes.
- EIS: The EIS is better suited to larger, more established businesses that are planning to scale their operations, expand their team, and enter new markets.
- Both SEIS and EIS: Some businesses might choose to use both SEIS and EIS as they grow. Many start-ups start with SEIS, then transition to EIS as they become more established.
Raising Funds for SEIS and EIS
Qualifying for SEIS and EIS doesn’t guarantee investment. It is important that your business understands all elements of SEIS and EIS fundraising, including fundraising caps, approved uses for funding, and how to find investors.
Fundraising caps
The SEIS and EIS both have limits on how much investment can be made. Limits apply in different ways, depending on whether you are the company or an investor:
- Companies are limited by how much money they can raise through the scheme
- Investors are limited by how much money they can invest while still receiving tax relief
For SEIS:
- Companies can raise a maximum of £250,000 through the scheme over their lifetime
- Investors can invest up to £200,000 per tax year across SEIS companies
For EIS:
- Companies can raise a maximum of £12 million through the scheme over their lifetime
- Investors can usually invest up to £1 million per tax year (or up to £20 million for Knowledge Intensive Companies)
Approved uses for funding
It is important to ensure that the funding you receive through SEIS and EIS is used for approved reasons, or ‘qualifying business activities’. These are activities that promote business growth and development.
This can include activities like:
- Product development
- Recruitment
- Marketing
- Operational expansion
Finding SEIS and EIS investors
The first step in finding SEIS and EIS investors is to apply for Advance Assurance. This is because it tells potential investors that your business is approved by HMRC. Although this is optional, it can give investors extra confidence. Many investors will only consider investing in businesses that are pre-approved by HMRC.
Once approved, you will need to consider how to make your business more visible to investors, as well as how to pitch yourself. Building strong business relationships, demonstrating market demand, and having accurate financial projections can all help attract the right investors.
Making an Advance Assurance Application
Applying for Advance Assurance is a relatively simple process that involves filling in a form and submitting it to HMRC. Alongside the application form, you will be expected to submit supporting documentation. Common examples include:
- Your business plan
- Financial forecasts
- Records of company accounts
- What you plan to spend any investment on
- Details of a prospective investor (if it’s your first time using a venture capital scheme)
Talk to an Expert start-up Accountant
Looking for advice about SEIS and EIS eligibility, or support with fundraising preparations?
Our expert start-up accountants are on hand to help you prepare for investment and support you through the SEIS and EIS application process, ensuring compliance at every step.
Contact our team today to find out more about how we can assist you and help your business grow.