The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) offer new and growing young UK businesses potentially attractive vehicles for securing much-needed investment.
Here, Clive Hyman, chairman and CEO of Hyman Capital explains how these schemes work.
What are these schemes?
SEIS is designed to help a company raise money when it is starting to trade, or has been trading for less than two years. The company can receive a maximum of £150,000 through the scheme, which offers private investors 50% up front tax relief.
EIS helps an early-stage company raise funds for growth, and is for those seeking up to £5m, giving investors 30% upfront tax relief.
Any gains from SEIS and EIS investment are 100% exempt from inheritance tax, capital gains tax and income tax.
It’s important to remember that tax reliefs will be withheld or withdrawn from investors if companies do not follow the rules for at least three years after the investment is made.
Most trades qualify but there are exceptions; 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.
Apart from being established in the UK, your company must not be trading on a recognised stock exchange at the time of the share issue and must not have any arrangements in place to become quoted.
If you’ve raised money through SEIS, you can still go on to raise further funds through EIS (providing you qualify).
What are the practicalities?
As an investor, you will have to source the entity or entities you are going to invest in. You might do this through a trusted fund manager, or 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. Be sure to do your due diligence – is the investment 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, it is highly advisable to engage a specialist tax adviser to help you acquire the necessary SEIS/EIS approval; the tax relief accreditation letter and advance assurance.
You’ll then need to market the offer – through a fund manager or a corporate finance house, with links to high-net-worth individuals who are qualified to look at it.
For most of the EIS opportunities (which by their very nature are much bigger financially) you need an introducer or specialist finance company that will manage everything and probably have a roster of companies for which they want to raise money.
Remember to 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.
This is very important as your investors cannot claim the tax relief until they receive their compliance certificate.
Do they work?
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, 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.
What other options are available?
Social Investment Tax Relief (SITR) allows individuals to claim relief on £1m of annual investment and provides 30% of income tax relief.
Venture Capital Trusts (VCTs) allow an annual investment of £200,000 on which they can claim 30% tax relief. With VCTs no tax is payable on dividends where it is on SITR, SEIS and EIS.
Investors can get capital gains tax relief on any profits they make under all four of the schemes.
The rules of VCTs can be a little complex to navigate for both company and investor – so do get professional, experienced help.
Finally, although these schemes are very attractive and can certainly help a company attract serious investors, it is still easy for both the investors and companies to come unstuck.
If raising money is important to the future of your business, then make sure you do it properly and seek expert guidance – a failed raise is not only costly but can make coming back to the market in the future very challenging.
Read more about the four main UK venture capital schemes.
Clive Hyman FCA is founder of Hyman Capital Services offering expertise in due diligence and managing change in business including raising equity and debt capital, mergers and acquisitions, interim management, board management and governance, deal structuring, and company turnaround.