SEIS and EIS Tax Relief

SEIS and EIS reduce the risk of investing in early-stage businesses by providing substantial tax reliefs to investors. Under SEIS, an investor putting £10,000 into a qualifying company receives £5,000 back as income tax relief — effectively halving their out-of-pocket cost. If the business fails, loss relief provides further tax relief on the net loss, meaning the downside is significantly cushioned. If the company succeeds and shares are sold after three years, any gain is completely free of Capital Gains Tax.

Under EIS, the income tax relief is 30% on investments up to £1 million (or £2 million if the company qualifies as knowledge-intensive). EIS is available to more companies than SEIS and can be used for follow-on investment rounds. Investors can also defer existing capital gains by reinvesting in EIS shares, and shares held for two or more years qualify for Business Property Relief from Inheritance Tax.

Both schemes operate through the issue of new ordinary shares. The investor pays the company the full investment amount, claims the tax relief through their Self Assessment tax return, and holds shares in the company. SEIS and EIS shares must be held for at least three years to retain the income tax relief.

Not all companies can use SEIS or EIS. For SEIS, the company must have gross assets of no more than £350,000 before the investment, have fewer than 25 full-time equivalent employees, have been trading for less than three years, and must not have previously raised EIS or VCT funding. There is a lifetime limit of £250,000 that can be raised under SEIS.

For EIS, the company must have gross assets of no more than £15 million before investment and no more than £16 million after, have fewer than 250 full-time equivalent employees, and must be a qualifying trade. Certain trades are excluded from both schemes including banking, insurance, property development, hotels, farming, and legal or accountancy services. The company must be carrying on, or preparing to carry on, a qualifying business activity.

Companies must apply to HMRC for Advance Assurance before advertising their shares to investors. Advance Assurance confirms that HMRC believes the company and the proposed share issue will qualify. After the investment is made, the company submits a compliance statement and issues compliance certificates (EIS3 or SEIS3) to investors so they can claim their tax relief.

Advance Assurance is submitted to HMRC's Small Company Enterprise Centre (SCEC) using the EIS1 or SEIS1 form along with supporting information about the company, its trade, the proposed share issue, and how the funds will be used. HMRC aims to process Advance Assurance applications within 15 working days, though complex cases take longer.

Advance Assurance is not legally binding — HMRC can still refuse to certify the investment after the shares are issued if circumstances change or the information provided was inaccurate. However, it provides important comfort to investors and is expected by most angels and equity crowdfunding platforms before they will promote your fundraise.

After shares are issued, the company files a compliance statement with HMRC. HMRC then authorises the company to issue compliance certificates to investors. This process currently takes several months, so investors must wait before claiming their tax relief. Specialist advisors and accountants experienced in SEIS and EIS can guide companies through the process efficiently and reduce the risk of compliance errors that could invalidate investor reliefs.