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Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme – some top tips

Following on from my recent blog where I reviewed the basics of EIS and SEIS, below I share some top tips – and make one request of HM Treasury!

Top tips

Top tip 1 – You can combine EIS and SEIS

An initial fundraise can be a combined SEIS/EIS round as long as the SEIS funds are invested at least one day in advance of the EIS funds. This may be attractive as the SEIS limit for a company of £150,000 is quickly reached on initial funding rounds. A joint application for advance assurance for both SEIS and EIS can be made to HMRC.

Top tip 2 – Get Advance Assurance

Advance assurance gives comfort to investors that the company qualifies for the scheme and is expected by most funds and HNWIs looking for EIS investments.

And it should be noted you will need to produce all the same information for the compliance statements to be submitted to HMRC as you would do for the Advance Assurance – so we would always recommend going for the Advance Assurance.

Top tip 3 – Know the exceptions to the rules

For more mature businesses there are three key routes to raise EIS outside the initial seven year investment period if certain criteria are met – either that initial funds were raised within seven years or a new product/ geographic market is being developed or if the company meets the knowledge intensive criteria.

Top tip 4 – Appreciate the complexities

SEIS / EIS is simple in principle but with tightly defined criteria to be met by the company and the investor. Thought is needed into how to approach the fundraising exercise in order to access the investor relief. Some additional work may be needed to consider the structure of the company in order to receive advance assurance from HMRC for the investor group.

Top tip 5 – Take advice

The extent and nature of the information now required by HMRC has increased in recent years following tightening the rules in 2015 and 2018 and some clarifications from the EU (EIS relief is a state aid). This is an area we have already helped many clients with – including some who did not believe that their companies would qualify for EIS and allowed them to pursue some quite significant fundraises with sophisticated investors that would otherwise not have been possible.

Top tip 6 – The reliefs can be taken away – so put protections in place

Investors and investee companies need to be aware that a number of the eligibility criteria need to be maintained for a period post investment (usually three years), otherwise the generous income tax relief will be clawed back and the capital gains tax exemption lost. We recommend that shareholder agreements specify these (where relevant) as areas where actions that cannot be taken without shareholder consent. Articles and investor agreements should be carefully reviewed and agreed before advance assurance is sought.

2021 and a request of HM Treasury

Many companies seeking initial funds look to family and friends for initial investments under SEIS before casting the net wider. This is something that we saw come to the fore in 2008 as the banking crisis unfolded with many employees made redundant start up their own business – and we expect to see that happen again in the coming couple of years.

As the impact of Covid19 continues companies will need to consider all options available to them from a fundraising perspective and those who believe an equity fundraise will be right for them will need to consider how SEIS / EIS interacts with that proposition.

I do feel that there is a category of business that could be using equity but is arguably priced out of the market as being ineligible for EIS at present.  These are the well-established less sexy business such as traditional manufacturing.  If we are to future proof our economy against shocks similar to Covid-19 then there is an argument that these businesses should be encouraged to grow and one measure that may assist with this would be a relaxation of the seven year investment period.  So, please could HM Treasury consider this as part of the package of measures to “build back better”? As the current limitations of EIS are EU orientated HMT may well have the power to amend post 31 December 2020 (Brexit)…

PKF Francis Clark

Of course, a fundraise involves more than just the tax analysis and we would encourage clients to consider the commercial aspects, which is something that our corporate finance team are very well placed to assist with.

PKF Francis Clark are members of the EIS association and experienced in dealing with companies seeking SEIS/EIS investment and investors claiming SEIS and EIS tax relief. Please contact Stuart Rogers or Kate Culley if you wish to discuss an SEIS or EIS investment for your company.

FEATURING: Stuart Rogers
Stuart is a corporate tax partner who specialises in advising fast growing and complex corporate entities, heading up the innovation and technology tax services group… read more
FEATURING: Kate Culley
Kate is a highly experienced tax senior manager specialising in shares tax – from transactions, structuring and entrepreneur’s relief to EMI and EIS. Her background… read more
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