For small and medium-sized enterprises (SMEs), acquiring the necessary capital for expansion can be the make-or-break factor when it comes to their success. Fortunately, the EIS and SEIS schemes offer a financial lifeline for businesses looking to scale-up.
If you're a UK company seeking funding options to fuel growth and innovation, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government-backed programmes that should be on your radar.
According to the latest National Statistics released by HMRC in 2023, London and the South East regions are dominating the investment scene - with 65% of EIS and 67% of SEIS investments in 2021 to 2022 coming from businesses based in these areas.
This highlights the importance of considering EIS or SEIS funding opportunities to ensure that you're not missing out on valuable investment prospects.
In this blog, we will explore the benefits and requirements of EIS and SEIS, their key differences, and how they can help your business attract investment.
- What is EIS and SEIS?
- What are the benefits of EIS and SEIS for businesses?
- What are the qualifying criteria for businesses to use EIS and SEIS?
- What is advance assurance and should I apply for it?
- What is the risk to capital condition?
- What can businesses do with the money raised?
- How can businesses prepare for the EIS or SEIS application process?
What is EIS and SEIS?
EIS and SEIS are UK venture capital schemes that enable businesses to secure growth funding while offering tax benefits to investors.
The Enterprise Investment Scheme is tailored to larger, well-established businesses looking for support in expanding their operations. Whereas, the Seed Enterprise Investment Scheme is a great option for smaller, early-stage businesses who need to raise capital to get started.
What are the benefits of EIS and SEIS for businesses?
By qualifying for the EIS or SEIS schemes, businesses can benefit from attracting investors who are keen to support their development while receiving tax relief. These schemes are particularly helpful for businesses that may face difficulties securing funding through traditional methods such as bank loans.
Both schemes allow businesses to raise significant amounts of capital - with EIS offering a maximum investment of £5 million yearly and SEIS offering a maximum investment of £200,000 yearly.
EIS and SEIS investment comparison
| Enterprise Investment Scheme (EIS) | Seed Enterprise Investment Scheme (SEIS) |
| Maximum investment of £5m yearly | Maximum investment of £200,000 yearly |
| Maximum lifetime investment £12 million | Maximum lifetime investment £250,000 |
| Investors are restricted from owning a share or voting control of 30% or more in the company from the date of incorporation until a minimum of three years following the share issue | |
Investors who participate in EIS and SEIS can also provide businesses with invaluable expertise and guidance, as many of them are seasoned business professionals. This ongoing support can help businesses navigate new challenges throughout their business lifecycle.
What are the qualifying criteria for businesses to use EIS and SEIS?
You'll want to ensure your company meets the qualifying requirements before jumping into the application for the Enterprise Investment Scheme or Seed Enterprise Investment Scheme. Don't skip out on doing your homework - carefully review and assess your eligibility beforehand. Trust us, it'll save you a headache in the long run if you don't qualify.
EIS and SEIS eligibility criteria
| Enterprise Investment Scheme (EIS) | Seed Enterprise Investment Scheme (SEIS) |
| Permanently established in UK | |
| Must be in a qualifying trade | Must be in a 'new' qualifying trade |
| Fewer than 250 employees* | Fewer than 25 employees |
| Trading less than seven years* | Trading less than two years |
| Gross assets valued at no more than £15 million | Gross assets valued at no more than £350,000 |
| Combined investment from EIS, VCT, SEIS, approved state aid within £5m limit allowable | Must not have already received investment through EIS or a VCT |
* There are some exceptions where the business is considered a 'knowledge intensive company'
In addition to the above criteria, your company must not have shares publicly traded on a recognised stock exchange during share issuance, own more than 50% of its shares by another company, or have control over any other company (except for qualifying subsidiaries). Also, your company cannot be part of a partnership for SEIS eligibility and should have a long-term plan in place for growth.
What is advance assurance and should I apply for it?
We highly recommended that businesses apply for advance assurance before seeking investors. This process allows you to assess if your investment proposal meets the necessary conditions of a venture capital scheme before approaching potential investors.
Obtaining approval from HMRC for advance assurance not only showcases the security of your investment to potential investors but also increases your chances of finding investors outside of the EIS and SEIS schemes. So, even if you don't plan to apply for EIS or SEIS, securing advance assurance can still have a positive impact on your business's ability to attract investment.
The advance assurance application process is an important one... but it can be complex and time-consuming. Consider bringing your accountant on-board to help you through the process and ensure that you provide all the necessary information. They can make things easier for you and help increase your chances of qualifying.
For both EIS and SEIS, you’ll need to provide HMRC with specific information, including:
- the funding amount you aim to secure
- your business plan and financial projections
- a copy of your most recent accounts
- companies that will benefit from the investment
- a summary of your trading and activities along with the budget allocation for each
- a recent copy of your company's memorandum and articles of association, along with any anticipated changes you plan to make
- a copy of the register of members from the date of application for advance assurance
- the most recent version of any materials you use to present your investment proposal to potential investors
- information about any additional agreements that exist between the company and its shareholders or Venture Capital Trust
- if you have an agent acting on your behalf, a signed letter from one of your directors or trustees for the EIS or SEIS application.
- any additional documents that supports your eligibility for the scheme.
You'll also need to demonstrate how the funds will comply with the risk to capital condition. This may involve sharing details of potential investors and outlining specific plans for the raised capital.
What is the risk to capital condition?
The risk to capital condition is a key aspect of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme and involves a two-part test.
- Your business must demonstrate a clear objective for growth and development resulting from the capital raised. HMRC considers factors such as increasing turnover, customer base, and employees, as well as investments in infrastructure, subcontractors, or specific projects.
- There must be a significant risk to the investor's capital and the company's finances. This ensures that the investment is geared towards long-term growth and development rather than short-term gains.
What can businesses do with the money raised?
Once you've secured funding through the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, the money must be used for qualifying business activities that promote growth and development, like hiring new employees, developing new products or services, or boosting your marketing efforts - basically, anything that will help take your company to the next level.
Time is of the essence! You'll need to make sure you've spent those funds within HMRC's specified time frame:
- EIS funds must be spent within 2 years
- SEIS funds must be spent within 3 years
How can businesses prepare for the EIS or SEIS application process?
Making sure you're well-prepared is key when applying for the Enterprise Investment Scheme or Seed Enterprise Investment Scheme. It's a big step towards obtaining funding for your business, so careful planning and execution are essential to success.
We've put together a quick list to help you get started:
- Research and verify your company's eligibility for the scheme (and apply for advance assurance if desired).
- Determine the amount of funding you need to raise and the percentage of your business you're willing to sell.
- Create a comprehensive business plan that outline your goals, objectives and financial projections. If you already have a plan, you may want to review and revise it.
- Ensure you have have a Private Placement Memorandum (PPM) that meets all regulatory requirements.
- Prepare a compelling presentation that effectively showcases your business and investment terms to potential investors.
- Identify and reach out to potential investors.
- Draft an investment agreement to ensure investors agree with the terms of the deal.
- Collate all required documentation and submit your EIS or SEIS application to HMRC.
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A Private Placement Memorandum (PPM) is a legal document that provides prospective investors with comprehensive information when selling stock or another security on a business. |
How can DSA Prospect help?
Navigating the complexities of Enterprise Investment Scheme and Seed Enterprise Investment Scheme can be daunting. It's always a good idea to seek the guidance of an experienced accountant to help you understand the process and maximise your chances of securing funding. It's all about turning uncertainty into opportunity!
If you're looking for investment through one of these schemes but are unsure of how to proceed, don't hesitate to contact us. Our team of experts can guide you through the application process, from preparation to submission, ensuring that you have the best chance of raising the money you need to take your business to the next level.
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