There are four main venture capital schemes backed by the government in the UK: The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR), and Venture Capital Trust (VCT).
Each of the schemes has different features but they all are designed to help raise funding for small to medium sized companies. By way of incentive, tax breaks are available to investors in return for taking on the risks often associated with start-ups or companies who are still in the early stages of the business cycle.
Investors will be able to buy new shares, bonds or assets for a set period of time in return for tax relief. Here we offer a snapshot of how each of the four venture capital schemes operate; but first we take a look at which companies can apply to raise money via one of the four schemes.
Who can apply to issue new shares or securities?
Each of the four schemes have some specific qualifying conditions but in general, HMRC states your company or social enterprise should:
- Be permanently based here or have a site in the UK where you carry out business that represents a substantial and essential part of your operations. This could include an operations centre, branch office, workshop, installation project, factory, or building site.
- Carry out one of the trades that qualify. This includes most trades (for non-qualifying trades, see here, as well as research and development and innovation.
- Not be trading your company shares on any of the recognised stock exchanges at the time the investment is made.
- Sell your first goods or services within a period of 7 or 10 years for a ‘knowledge-intensive company’ that meets certain operation cost conditions.
How much money can you raise?
The most you can raise in total from all of the schemes when added together is £5 million in any 12-month period, or £12 million in the lifetime of your registered company. In some circumstances, for example if you carry out research and development, the upper limit may be higher.
Enterprise Investment Scheme (EIS)
EIS is designed to help you raise finance to help grow the business by offering tax breaks to investors who purchase new shares in your company. There are a number of rules that need to be followed by you so investors can claim the right level of tax relief. Shares issued under EIS must be paid up in full and must be non-redeemable, full-risk ordinary shares. Nor should the shares carry any preferential rights to dividends or include rights to your company assets. Other conditions also apply.
The Seed Enterprise Investment Scheme (SEIS)
As the name suggests, the SEIS scheme applies to those companies which are still at the incubation stage or have been trading for less than two years. The company should have fewer than 25 employees on the payroll and have no more than £200,000 in gross assets. You can raise up to £150,000 through this type of scheme and the money must be spent within three years from the date of the share issue on one of the qualifying business activities or trades. Share requirements for SEIS are the same as for EIS.
Social Investment Tax Relief
Organisations that can apply for SITR includes registered charities, community interest companies (CICs) and any community benefit society that is run for the benefit of the community as a whole. The organisation should not have more than 500 employees or more than £15 million in gross assets. The maximum amount you can raise via SITR is some £250,000 over a three-year period and any shares sold must be new shares, paid for in full. You must not issue preferential shares.
Venture Capital Trusts
VCTs are listed companies that invest in smaller companies which are not quoted on the stock exchange. VCTs are usually run by a fund manager and offer generous tax reliefs to individuals willing to invest in higher risk companies. There are strict rules on how VCTs can invest the money they raise and they can only invest in your company if you have fewer than 250 employees and have gross assets of less than £15 million.
The above is not an exhaustive list of conditions for any of the four schemes and you should always seek professional advice before deciding which is the right one for your company.