In these blog posts we'll be discussing some of the UK Government's tax incentives that have been helping the UK startup scene flourish. These various schemes are essential to any aspiring entrepreneur as they can have a very significant impact on your burn and cashflow situation.
We'll start off with the Seed Enterprise Investment Scheme (SEIS) and its bigger brother the Enterprise Investment Scheme (EIS). First announced in 2012, these schemes have as an objective according to the Chancellor, to stimulate entrepreneurship and kick-start the economy. While the SEIS allows companies to raise not more than £150k via SEIS over a 3 year period, the EIS allows up to a total of £5m SEIS and EIS over a 12 month period.
What is it?
The SEIS provides investors with a 50% income tax reduction on SEIS approved projects, while the EIS provides investors with a 30% income tax reduction on EIS approved projects. In addition, there are no capital gains as long as the investment is held for 3 years.
A simple example for SEIS:
Income tax liability: £15 000
SEIS investment: £10 000
Tax relief for SEIS @50%: £5 000
Final income tax liability: £10 000
Each investor is eligible for up to £100k of SEIS and £1m of EIS investments per year.
The investor must not be an employee of the company or subsidiary.
The investor must not own a substantial share of the issued share capital (<=30%), voting rights or rights to assets on a wind up for up to three years from investment date.
The investor must be investing in shares for genuine commercial reasons, and not part of a tax avoidance arrangement.
The company must have less than 25 full-time employees.
The company must be unquoted and not controlled by another company.
The issuing company must either be a UK resident company carrying on a trade in the UK or be an overseas company with a UK
permanent establishment carrying on a trade.
SEIS-specific company restrictions:
The company may not raise more than £150 000 of SEIS investment over a 3 year period.
The company must not have traded for over 2 years.
All SEIS investment monies must be used within 3 years of the date of raising the money for the purpose of a qualifying business activity.
The company must have no more than £200 000 in gross assets prior to the share issue.
EIS-specific company restrictions:
The company may not raise more than £5 000 000 from SEIS, EIS and VCTs investment in any 12 month period.
All SEIS investment monies must be used within 2 years of the date of raising the money for the purpose of a qualifying business activity.
At least 70% of any SEIS must have been spent.
The company must have no more than £15 000 000 in gross assets prior to the share issue.
To aspiring entrepreneurs, you can obtain preliminary advance assurance from the HMRC regarding whether your project qualifies as SEIS or EIS (http://www.hmrc.gov.uk/forms/eis-seis-aa.pdf), this will definitely add some firepower to your conversations with potential angel investors and might sweeten the deal in your favour.