UK Startup Funding: A Guide to SEIS and EIS Schemes

Raising funds to fuel company growth is a challenge many UK startups and SMEs face. From business grants to venture capital, the options available to scaling companies are sprawling. However, one particularly popular avenue includes the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). These are two powerful funding instruments designed to attract investors by offering enticing tax reliefs. 

In this guide, we explore SEIS/EIS, the eligibility criteria for each scheme, and the key benefits both schemes provide to scaling companies. 

We’ll cover: 

• What is SEIS and EIS?
• How does the SEIS and EIS work?
• Am I eligible for SEIS/EIS? 
• What are the benefits of SEIS and EIS? 
• What are the risks of SEIS and EIS?
• How can UK startups maximise the chance of securing funding through SEIS/EIS?
• Apply for SEIS/EIS funding

Raising capital? Planning a round? Our Financing lawyers work with founders and investors to get funding over the line and future plans set up right.

What is SEIS and EIS? 

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government-backed initiatives designed to promote the growth of startups and small businesses in the UK by incentivising investment. Launched by the UK government, these schemes provide tempting tax reliefs to investors who finance qualifying companies, effectively lowering their financial risk. Under SEIS, capital gains tax relief is available on 50% of the investment, while EIS offers up to 30%. 

• SEIS: The SEIS targets very early-stage companies, making it beneficial for businesses just starting out. It was introduced to address the difficulties faced by startups in accessing capital. With SEIS, investors receive significant tax breaks for their support, promoting investment in younger, smaller companies with high growth potential. Startups can earn a maximum of £250,000 under SEIS.
  
  
• EIS: On the other hand, the EIS is structured to support more mature, though still relatively small, enterprises that need a financial boost. Since its establishment, EIS has been a crucial avenue for growing companies looking to tap into funding that might otherwise be elusive. Under EIS, companies can earn significantly more funds, of up to £5 million each year and a maximum of £12 million in a company’s lifetime.

It’s worth noting here that the UK government stipulates a limit on the total amount of money a company can raise in its lifetime from, 

• Enterprise Investment Scheme (EIS)
• Seed Enterprise Investment Scheme (SEIS)
• Venture Capital trusts (VCTs)
• Social Investment Tax Relief (SITR)
• State aid (approved under risk finance guidelines). 

While both SEIS and EIS share a common goal of fuelling startup success, they cater to different stages of business development. 

How does the SEIS and EIS work?

Both SEIS and EIS are designed to provide UK startups and SMEs with an accessible route to funding. 

The process for SEIS

For SEIS, you’ll first need to assess whether your company is eligible for the scheme (we’ll cover this in more detail below) commonly followed by an application for an "Advance Assurance" from HMRC. This step involves presenting your business plan, financial projections, and evidence of eligibility to prove your company's suitability for the scheme. 

Once approved, you can pitch to investors, highlighting tax breaks they would benefit from by investing in your company under SEIS. 

The process for EIS

Like SEIS, you’ll first need to check your company’s eligibility for the scheme. Once established, you can seek to obtain Advance Assurance for a larger investment cap. 

In both cases, once the investment is secured and the shares are issued, a company secretary, director, or agent will need to complete a compliance statement to formally register the investment with HMRC. This step is key as it enables your investors to claim tax relief. Bear in mind, that your company needs to use the investment in a qualifying trade to ensure the investors retain their reliefs, adhering to the conditions stipulated by HMRC.

Am I eligible for SEIS/EIS? 

Let’s tackle eligibility for SEIS and EIS, respectively. 

EIS eligibility

The UK Government is very clear on eligibility for this scheme. Your company must:

• Have a permanent base in the UK.
• Not be listed on a recognised stock exchange at the time shares are issued, with no intention of doing so.
• Not own another company, except for eligible subsidiaries.
• Not be owned or controlled by another company, with no other company owning more than 50% of your shares.
• Do not plan to shut down after completing a specific project or set of projects.

Your business (and any eligible subsidiaries) must also:

• Not have gross assets valued more than £15 million before issuing shares, and not have more than £16 million immediately afterwards.
• Employ fewer than 250 full-time equivalent staff when the shares are issued.

SEIS eligibility

Next up, SEIS. You may qualify for SEIS if your company: 

• Engages in a new qualifying trade.
• Is based in the UK.
• Is not listed on a recognised stock exchange at the time shares are issued.
• Has no plans to become a publicly listed company or a subsidiary of one at the time of the share issue.
• Does not control another company, except for a qualifying subsidiary.
• Has not been under the control of another company since it was incorporated.

Your company and its subsidiaries must also:

• Have gross assets valued at £350,000 or less when the shares are issued.
• Not be part of a partnership.
• Have fewer than 25 full-time equivalent employees in total when the shares are issued.
• The Seed Enterprise Investment Scheme cannot be used if your company has already received funding through the Enterprise Investment Scheme (EIS) or a venture capital trust (VCT).

What are the benefits of SEIS and EIS? 

With SEIS and EIS, you're tapping into a potential treasure trove of benefits that can fuel your company’s growth. These schemes are designed not only to make your enterprise attractive to investors but also to ensure the longevity and sustainability of your business.

Let’s take these benefits one by one. 

Attractive tax incentives

Perhaps the most compelling benefit for investors (and therefore companies seeking to attract investors) is the tax relief. SEIS offers a generous 50% tax relief on investments up to £100,000 per tax year, while EIS provides 30% relief on investments up to £1 million. This means your investors can significantly reduce their tax liabilities, making it more enticing for them to support your business. 

Mitigating investment risks

SEIS and EIS can serve as helpful safety nets, reducing the financial risk associated with early-stage investments. Both schemes offer loss relief, meaning investors can claim tax deductions if business doesn't perform as expected. This feature essentially lowers the stakes, encouraging investors to back your venture with confidence. 

Enhanced investment opportunities

With the generous capital gains tax exemption after three years, both schemes allow investors to enjoy potentially high returns on their investment. This is particularly beneficial for startups aiming to retain investors in the longer term and leverage more substantial funding rounds across their growth phases. 

Long-term support for growth

The EIS, with its broader allowances, is an attractive option for businesses maturing beyond the initial stages. It facilitates larger funding rounds, so your growing company can continue to innovate and scale while benefiting from tax-advantageous schemes.

What are the risks of SEIS and EIS?

While SEIS and EIS offer enticing advantages, it’s worth being mindful of potential risks.

• Firstly, these schemes are designed to back startups and early-stage companies. Naturally, this comes with a higher level of risk, which can expose investors to a higher failure rate than more mature enterprises.
  
  
• Both SEIS and EIS necessitate strict adherence to rules set by HMRC to maintain eligibility. Any non-compliance, whether intentional or not, can to disqualification from the schemes, resulting in potential clawbacks of the reliefs given. With this in mind, it’s crucial that businesses stay informed about these regulations and ensure meticulous record-keeping and reporting.
  
  
• SEIS and EIS investments often require a holding period—usually a minimum of three years - to benefit from the tax advantages fully. This can tie up funds longer than anticipated, impacting an investor’s cash flow, which places pressure on companies to truly sell the long-term advantages of the scheme.

How can UK startups maximise the chance of securing funding through SEIS/EIS?

Securing funding through the SEIS or EIS schemes can be a game-changer for startups and SMEs, but it's essential to prepare thoroughly. At Biztech Lawyers, our finance and investment lawyers have supported countless scaling companies through the process, and have several recommendations for getting it right… 

• Start by clearly defining your business plan. Investors are more likely to invest when they see a well-thought-out strategy. 
• Engage in local startup communities or pitch events where potential investors or advisors might be present. Platforms like LinkedIn can be particularly useful in connecting you with experienced investors interested in SEIS and EIS opportunities.
• Ensure your business is fully compliant with SEIS and EIS regulations. This includes keeping accurate financial records and meeting the requirements set by HMRC. Missteps in compliance can deter investors or even invalidate tax reliefs, so consulting with accountants or legal advisors familiar with SEIS/EIS is critical.
• Finally, communication is key. Be transparent with potential investors about your business's risks and opportunities. Regularly update them with your progress and future plans. This openness builds trust and can potentially lead to further investment rounds. 

Apply for SEIS/EIS funding

Exploring funding for your UK company? Our expert fundraising lawyers can help you assess the options available to you - and can even support you through the SEIS/EIS process.

Interested? Get in touch today to see how we can support.