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Raise funds for your small business through EIS and SEIS

If you’re raising money for your business, don’t ignore the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). These offer new and growing young businesses in the UK attractive vehicles for securing inward investment. They benefit both the investor and recipient – and they are backed by the Government.

raise funds for your small business

Clive Hyman the CEO of Hyman Capital explains the two different methods of business funding. EIS was introduced in 1994 as the successor to the Business Expansion Scheme. The Seed Enterprise Investment Scheme (SEIS) debuted in 2012, to attract investors to start-ups that may have otherwise have been viewed as too risky.

SEIS is designed to help companies raise money when they are just beginning to trade, or companies that have been trading for less than two years. The EIS, on the other hand, can help early-stage companies raise funds in their first seven years, to help them grow their businesses, as they are able to give larger amounts of funding.

Businesses raising money under SEIS can receive a maximum of £150,000 through the scheme, offering private investors 50% upfront tax relief – hugely attractive although the amount of investment is relatively small. The businesses must have assets of no more than £200,000 and have fewer than 25 employees. The company must also be based in the UK, and HMRC requires proof of a company’s permanent establishment in the UK. The ‘proof’ includes having an office, factory or one of the following:

  • A place of management
  • A branch
  • A workshop
  • A quarry, mine, oil or gas well,
  • A building site, such as a construction or installation project.

This is not an exhaustive list, but the type of business a company carries out will be the deciding factor in what premises and facilities are required to meet the conditions for investment.

EIS is for those seeking funding of up to £5 million and gives investors 30% upfront tax relief. They must also have less than £15 million of assets and up to 250 employees and therefore is open to far more companies than SEIS.

The same qualifying factors on UK residency above apply. Companies cannot raise more than £5 million each year and more than £12 million in their lifetime, from the four venture capital schemes that currently exist. Individuals cannot invest more than £1 million each year.

Any gains from SEIS and EIS investment are 100% exempt from inheritance tax, capital gains tax and income tax. Remember, HMRC stresses that tax reliefs will be withheld or withdrawn from investors if companies do not follow the rules for at least three years after the investment is made.

There are two types of funds invested in companies seeking SEIS and EIS money, they are HMRC “approved” and HMRC “unapproved”. Both spread the risk over numerous companies which is important. Unapproved does not mean the fund is dodgy. All it means is that HMRC has not given its structure prior approval. Approved does not mean “protected” or that HMRC has approved the quality of the investments – but there are tax planning differences between the two. With approved funds, the ability exists to “carry back” for income tax relief purposes and treat the investment as if it had been undertaken in the previous tax year. Money raised by a new share issue must be spent within two years of the investment or if later, the date the company started trading. It must be used to grow or develop the business and must not be used to buy all or part of another business.

Most trades can qualify for SEIS or EIS – but there are exceptions. For example, coal or steel production, farming or market gardening, leasing activities, legal or financial services, property development, running a hotel or nursing home, and electricity, heat, gas or fuel generation. Also, apart from being established in the UK, a business must not be trading on a recognised stock exchange at the time of the share issue and they must not have any arrangements in place to become quoted.

For start-ups, SEIS is an attractive way to target much-needed funding. Just because a company has availed of SEIS funding does not mean it cannot go on to raise further funding from an EIS, although the amount it can raise from this will be reduced to up to £4.85m.

Companies raising money under EIS must do so within the first seven years of its first commercial sales. If you did not receive investment within the first seven years, or now want to raise money for a different activity from a previous investment, you will have to show that the money is required to enter a completely new product market or a new geographic market and that the money you are seeking is at least 50% of the company’s average annual turnover for the last five years.

So, what’s involved?

If you are an investor, you have to source the entity or entities you are going to invest in, which you might do through a trusted fund manager, or you might find a corporate finance house that has an opportunity. You would need to get out into the market and network and identify what it is you would like to invest in. Investors need to look at the investments and make sure they are sound. It is all too easy to get distracted by the tax relief. The tax relief is great to have, it is obviously hugely advantageous. But what is the point of tax relief if the investment is rubbish? The business still has to have the necessary fundamentals. You still have to assess it. Is the management team any good? Are the businesses you are investing in worth it? Remember it is your cash you are going to have to invest. The tax relief should not blind you to good common-sense investment practice.

If you are a company seeking investment, you have got to get a specialist tax adviser to help you acquire the necessary approval to do so, the tax relief accreditation letter and advance assurance. You have either got to market it through a fund manager or a corporate finance house to high-net-worth individuals who are qualified to look at it. There are various platforms people use to market investment in their companies – not crowdfunding ones, however. For most of the EIS opportunities, you need an introducer or specialist finance companies that will manage everything and probably have a roster of companies for which they want to raise money.

You must complete a separate application for each share issue and if your application is successful, HMRC will confirm the decision and send you compliance certificates to give to your investors. Your investors cannot claim the tax relief until they receive their compliance certificate.

Does it work?

Yes, both schemes are success stories. The latest available HMRC statistics show that since EIS was introduced, 26,355 companies have received investment and almost £16.2bn of funds have been raised. In 2015-16, 3,470 companies raised a total of £1.89bn of funds under EIS and in 2014-15, 3,370 firms raised £1.92bn of funds.

London and the South East accounted for the largest proportion of investment. Companies registered in these regions received 67% of investment in 2015-16. Between 2015-16, 2,360 companies received investment through SEIS and £180m of funds were raised – similar to 2014-15, when 2,365 companies raised a total of £180m.

More than 1,800 of these companies raised funds under SEIS for the first time in 2015-16, representing £154m in investment. The HMRC statistics show that in 2015-16, companies from the hi-tech and business services sector made up 68% of the amount of SIES investment received.

But remember – it is very easy for investors and companies to come unstuck. So it is advisable to seek expert guidance at all stages of the process.

More on small business funding and venture capital.

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