Have you ever thought about starting a new business venture but very quickly dismissed the idea because you had no idea how you would fund it?
You wouldn’t be the first.
Starting a new venture can be exciting but also a little daunting. Especially where the business is new, innovative, or naturally higher risk. On top of that, you also need to consider how to raise the startup funds needed to set things in motion.
The good news is that you don’t always have to go it alone.
SEIS, EIS and Advance Assurance: Helping Startups Raise Funds
The UK Government offers various Venture Capital Schemes designed to help new and smaller companies grow by making investment more attractive to potential backers. This is done by offering investors generous tax reliefs when they invest in qualifying companies.
If the investment does not go to plan, investors may be able to benefit from certain tax reliefs that can help reduce their potential loss.
If you’ve ever seen an episode of Dragons’ Den, you’ll know why there can be more incentive to invest than simply the prospect of receiving dividends.
The two main Schemes are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). They are closely related but different enough that it’s important to understand the distinction between them.
For investors who would like more confidence that a company is expected to qualify for these Schemes, HMRC’s Advance Assurance can provide some comfort before they commit their money.
SEIS – Getting Off the Ground
Aptly named the “Seed” Scheme, SEIS is aimed at very early-stage companies that are just getting started – generally those less than 3 years old.
This is often the first Scheme a startup will look at, because the investor reliefs are particularly generous. Backing a brand-new business naturally carries more risk, as there may be little or no trading history to indicate how likely a return on the investment will be. The higher level of relief reflects this greater risk.
Under SEIS, a company can raise up to £250,000 and investors may be able to claim income tax relief of up to 50% of the amount invested, subject to an annual investment limit of £200,000. Other reliefs may also be available, including capital gains tax relief and exemptions, inheritance tax relief and loss relief.
The main eligibility criteria to be aware of, for the company and its group, include:
- No more than £350,000 in gross assets
- Fewer than 25 full-time equivalent employees
- Not having previously received investment through EIS
EIS – Development and Growth
EIS is generally aimed at companies that are a little further along in their journey than a typical SEIS company.
EIS can be useful for companies looking to raise a larger funding round, often after an initial SEIS raise. The order matters – funds can be raised through SEIS first and then through EIS but generally a company cannot raise SEIS investment after it has received EIS investment.
While some of the investor reliefs are lower, the amount on which an investor can claim tax relief is higher than under SEIS.
Under EIS, a company can generally raise up to £10 million in a 12-month period, subject to an overall limit of £24 million. Investors may be able to claim income tax relief of up to 30% of the amount invested, subject to an annual investment limit of £1 million, alongside other potential capital gains tax reliefs and exemptions, inheritance tax relief and loss relief.
The main eligibility criteria to be aware of, for the company and its group, include:
- No more than £30 million in gross assets
- Fewer than 250 full-time equivalent employees
- Not being in financial difficulty
Advance Assurance – Investing with More Confidence
A non-mandatory application that can, in practice, feel somewhat mandatory.
Advance Assurance is a request made to HMRC before an investment takes place. It asks HMRC to give its view on whether the company and proposed investment are “highly likely” to qualify for SEIS or EIS tax relief.
While Advanced Assurance is not required as part of the application to HMRC, many investors will expect it to have been sought before they are willing to proceed with an investment.
As much of the information required for an Advance Assurance application overlaps with that needed for EIS and SEIS, it can make sense to consider applying for it as part of the funding process.
If granted, Advance Assurance can be very helpful when raising funds. However, it is important to remember that it is not an absolute guarantee that tax relief will be available in every case. HMRC’s view is based on the facts and plans provided at the time of the application. If the plans or circumstances change significantly, the position may need to be reviewed.
Helping Your Startup
While the benefits of the Schemes are not received directly by the company, they can make it easier to attract investment by reducing some of the risk for investors. Your startup then benefits from the funds raised.
This can make a real difference if you are looking to raise money for product development, recruitment, market testing or expansion.
As with most tax reliefs, the detail matters.
The rules apply to both the company and the investor and they need to be considered before shares are issued or funds are spent. A failure to meet the relevant conditions, or a significant departure from the plans presented to HMRC, could put the entire availability of tax relief at risk.
If you’re considering raising investment through SEIS or EIS, or applying for Advance Assurance, please speak with us. Getting the right advice from the outset can help ensure the process is structured correctly and runs as smoothly as possible.