Does your company need third-party investment to reach its potential?

The Enterprise Investment Scheme ('EIS') and Seed Enterprise Investment Scheme ('SEIS') are two of HMRC's venture capital initiatives which are designed to help small and medium sized companies obtain third-party investment by incentivising the investor. They work by providing income tax and capital gains tax reliefs to individuals who subscribe for new shares in qualifying companies.

How EIS works

A company can raise up to £5 million each year, and a maximum of £12 million in its lifetime through the EIS scheme. There must be a 'risk to capital' for the investor, meaning that the monies raised must be applied for further growth of the existing trade and there must be a genuine risk that the investors could lose their capital.

Investment must be received within seven years of the company's first commercial sale and there are a number of conditions a company must meet to be eligible for the scheme, including, but not limited to:

• Having a UK permanent establishment
• Not be trading on a recognised stock exchange at the time of the share issue, or planning to become listed
• It cannot be controlled by another company, or, specifically, have more than 50% of its shares owned by another company
• If it has subsidiary companies, these must be qualifying subsidiaries
• The company (or its group), must not have gross assets in excess of £15 million immediately before the share issue or £16 million immediately after and must have fewer than 250 employees at the time of the issue
• The companies trade must be carried on with a view to making a profit and not be an 'excluded activity'. The list of excluded activities is exhaustive.

The company must meet the scheme rules for at least three years after the investment is made otherwise investor tax reliefs will be withdrawn. 

There are different rules for 'knowledge intensive' companies which may be used if your knowledge intensive company cannot raise funds under the usual EIS scheme, due to company age, the size of investment required or if an investor wants to invest more than the individual investor limits.

SEIS

The SEIS scheme is aimed at new start up trades seeking investment of up to £250,000 (less any other de minimis state aid received by the company in the three years up to and including the date of the investment). The trade must not have been carried out for more than three years by the company, or by any other person who has transferred the trade to the company. A company cannot receive investment under the SEIS scheme if it has already had investment via EIS or another venture capital scheme.

Many of the company conditions for SEIS mirror those for EIS, however for a company to seek investment under SEIS, the company (or its group) must not have gross assets of more than £350,000 when the shares are issued and must have fewer than 25 full time employees at the date of issue.

Again, the company must meet the scheme rules for at least three years after the investment is made otherwise investor tax reliefs will be withdrawn. 

Advance assurance

Prior to a share issue, a company can apply to HMRC for advance assurance that the investment will meet the qualifying conditions for the EIS or SEIS scheme, by providing detailed information in relation to the proposed share issue via an online application.

If HMRC give advance assurance, they will issue a statement saying that the investment is likely to qualify. This is attractive to potential investors as it will provide comfort that their investment will provide them with the relevant tax reliefs, on condition that they hold the investment for the qualifying period and the company maintains its EIS/SEIS status. 

Compliance statement and certificates

Following the issue of shares, the company must submit to HMRC a compliance statement (Form EIS1 or SEIS1) for the relevant scheme, containing detailed information in relation to the issue. If the company has already obtained advance assurance in relation to their issue, this is provided to HMRC along with any changes to the scheme. If advance assurance was not sought, full details of the investment must be provided on the compliance statement.

If HMRC agree, they will issue a letter of authorisation, a unique reference number and a compliance certificate. The company then issues the compliance certificates, with the unique investment reference to the investors, to enable them to claim the tax reliefs.

How can we help?

As Knill James has both a tax advisory and a corporate finance function, we are perfectly placed to assist you through the process of seeking investment via EIS or SEIS. We can:

• Assist you with investor pitch decks and business plans
• Apply for advance assurance under the EIS or SEIS scheme
• Provide assistance with valuation matters
• Assist you with finding investors via our network
• Prepare share cap tables
• Ensure that share issues at each investment round don't result in an undue dilution of the original investors
• Prepare the statutory paperwork in relation to new share issues
• Complete the EIS or SEIS compliance obligations post the share issue; and
• Prepare the individual investors' personal tax returns to claim the tax reliefs

If you would like more information please contact Zelie Byrne, Tax Manager, on Zelieb@knilljames.co.uk.