Entrepreneurs’ most precious resource is time. Figuring out what is worth spending time on and what is not is a crucial part of success in business. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are certainly worth taking the time to understand.
Below are some practical tips when dealing with SEIS/EIS from the founders of TaxScouts, entrepreneurs who have gone through the fundraising process. Tram Abraham, co-founder of TaxScouts, outlines the key points that he says "with the benefit of hindsight would have been helpful to know in advance".
EIS & SEIS matter — take the time to understand them
Unless a newly set-up business is profitable from day one or has big cash reserves, fundraising is essential for growth.
It is hard to overestimate the importance of SEIS/EIS for successful fundraising in the UK. There is plenty of information about both tax schemes, especially when raising funds on a crowdfunding platform, and Crowdcube has published an excellent summary guide on the mechanics of those tax schemes.
Just one example of those mechanics: with SEIS, investors can claim back 50% from HMRC on the income tax on their investment. This, in effect, reduces the cost of investment by half. If an investor is forced to choose between investing in two companies, one that is eligible for participating in these tax schemes has a clear advantage.
In addition to the relief mentioned above, both SEIS and EIS come with several other tax benefits. In short, SEIS/EIS eligibility alone significantly boosts the incentive to invest.
Meeting SEIS/EIS criteria is investment value by itself
Before applying for SEIS/EIS, a good first step is to check if the business raising funds meets the criteria to be part of the schemes. HMRC has set out a comprehensive list. In a nutshell, the government’s goal is to support innovative businesses that are in early stages of their life. A business is likely to meet the criteria if it:
- Is a UK-based limited company
- Is less than 2 years old
- Does business in the area that is not specifically excluded from EIS/SEIS
HMRC issues a document of “advance assurance” confirming that a business qualifies. It’s the closest you can get to a guarantee.
With recent changes to this HMRC process, applicants are required to provide the list of investors who are investing in their business. This puts them in a catch-22: investors are happy to invest if business is eligible for SEIS or EIS, but getting assurance on the eligibility from HMRC requires investors who have signed up to putting in their money.
There are two practical ways to address this.
- When the company meets SEIS/EIS eligibility criteria, don’t be afraid to show it to your investors, even if you don’t have the assurance from HMRC yet. Just ensure that you meet the criteria and communicate to investors that this is your — or your tax advisor's — assessment, rather than official assurance from HMRC. According to HMRC, the acceptance rate for EIS/SEIS applicants is around 85%. This means almost 9 out of 10 chance you will get assurance eventually.
- Work with crowdfunding platforms such as CrowdCube. According to guidance provided by HMRC, if you can demonstrate to HMRC (via emails or documents) that you have started the screening process with the platform and are confirmed to be a viable investment prospect to their investors, it is sufficient to start the advance assurance process.
Don't assume your investors are aware of the benefits SEIS/EIS
Unless you’re dealing with professional angel investors, never assume your investors are aware of the benefits of SEIS/EIS. Not all — especially if you’re using crowdfunding platform — do investments for a living. Adding an “SEIS/EIS eligible” stamp to your pitch deck will only attract those who have spent enough time investing in the past.
Don’t be afraid to have a dedicated slide in your pitch deck that explains in simple terms all the benefits of your business being eligible to those schemes. If yours has an appendix section, this is the right spot for it.
Make sure to help your investors with their tax claims
One easy way to maintain a good relationship with your investors is to help make their tax relief claims hassle-free.
Firstly, familiarise yourself with the process of how your investors can claim their SEIS/EIS tax reliefs — we wrote a short guide on this last year.
Your investors will need to claim their tax relief when they submit their personal tax returns, either by themselves through their self-assessment or by getting help from an accountant.
The SEIS3 or EIS3 forms they need are issued by your company. In order to do so, you’ll need to go through the SEIS/EIS application process by filling out the EIS1 or SEIS1 form. You can do this once you’ve spent at least 70% of the funds invested in your business or have been trading for at least 4 months.
When the application is approved by HMRC, you’ll receive EIS1/SEIS2 and EIS/SEIS3 forms. The latter need to be filled out and distributed to your investors.
When you fundraise on crowdfunding platform such as Crowdcube, much of this admin is taken off your plate. However, if you’re dealing with a lot of first-time or casual investors, then adding a simple explanatory letter while sending out the EIS3/SEIS forms can go a long way.
In summary, EIS and SEIS are incredibly generous investment schemes. Participation is low-cost and can significantly increase your ability to attract investors. Make sure you take the time to look into your business's eligibility.