Changes to EIS / SEIS - a win for UK startups
By Alice Williams, Portfolio Operations Manager at Crowdcube. 12th Oct 2022
Whilst mixed responses have been registered by the public following the UK government’s recent mini-budget announcement, we will focus on the positive news for startups and private investors.
The UK is one of the world’s leading startup ecosystems as a result of the current EIS and SEIS schemes. When the schemes were adopted in 2015, the EU required the inclusion of a ‘sunset clause’ so that the schemes expired after 10 years – in other words, shutting out relief to investments made on or after 6 April 2025, unless the schemes were renewed.
The value of the EIS and SEIS schemes have been invaluable since their inception to the growth of startups. 32,965 companies have received a total of £24 billion funds from the EIS scheme and £1.4 billion since the launch of SEIS scheme in 2014 (Gov.uk).
With the general economic sentiment, alternative sources of investment, like angel investors and crowdfunding, are more vital than ever before to help get these emerging businesses off the ground.
Fear grew within the industry when the sunset clause was up for renewal but Kwarteng’s extension of EIS is showing promising signs of a real commitment to encouraging entrepreneurship in the UK.
So, what are the key changes from the mini-budget?
The EIS and VCT schemes will be extended past the original 2025 sunset clause and the SEIS caps will be increased as of 6 April 2023:
➡️ Companies can now raise £250,000 in SEIS.
- This was previously £150,000.
➡️ Companies can raise SEIS within the first 3 years of trading.
- This was previously 2 years.
➡️ Companies must have less than £350,000 in gross assets to be able to raise SEIS.
- This was previously £200,000.
➡️ No SEIS after EIS – if your company has ever issued EIS shares, you can not raise SEIS after that.
This is very exciting news for founders, startups, investors and the crowdfunding industry!
The Growth Plan document itself says: “The government remains supportive of the EIS and VCT and sees the value of extending them in the future.”
Why does it matter and what do people think?
The industry as a whole is over the moon with the extension of the schemes - with Harry Heartfield, Senior Partner at Edition Capital stating “EIS and VCT enables businesses to secure equity investment and grow rapidly, with the tax reliefs helping reduce investors risk. We are delighted that this government has extended these schemes. It will allow businesses to continue to benefit from access to over £2bn of annual funding which could have disappeared overnight.” (FT Adviser).
“Too much support during COVID was in the form of debt – through bounce back loans, CBILs and other loan schemes. These schemes allowed businesses to survive but they are going to be weighed down by loan repayments in the future. Companies need access to equity to help them make long term investments to boost productivity.
What does it mean for startups and their founders?
For startups in the UK, the decision to extend and widen the scheme means that raising funds can be more accessible and in return increase the number of impact-driven and transformative startups to realise their potential and generate wider positive impacts.
Sarah Barber, CEO of Jenson Funding Partners, which manages SEIS funds, believes the change will also save UK founders precious time and resources. “Entrepreneurs should now have to spend less time fundraising, and more time doing what they do best — building a business,” she says. “Until now, it’s felt like successive governments were sleepwalking on SEIS” (Sifted).
The risk of losing these schemes caused a fear in the future of the startup ecosystem in the UK, as according to investment broker Wealth Club, if these tax incentives had expired, UK startups could have missed out on some £900m (Sifted).
What does it mean for female founders?
We are Radikl, a women’s startup and accelerator, believes the previous two-year SEIS deadline has proved to be a barrier for women entrepreneurs, as women are statistically more likely to have care commitments, additional responsibilities and demands, so have less time to focus on their business. Women are also less likely to know investors and more likely to receive a 'no' during their investment rounds - both time-impacting factors (We are Radikl).
So, in particular the extension for companies to now raise SEIS within the first 3 years of trading is a small but mighty change for female founders!
What does it mean for investors?
It is fantastic for investors who can carry on investing in startups via these tax-efficient schemes. EIS-qualifying companies are typically young, innovative companies. These types of companies find new solutions to everyday problems or create something that didn’t exist before. Extending the EIS, SEIS and VCT schemes is encouraging investors to contribute to the economy and promote the UK’s reputation for innovation and entrepreneurship (Octopus Ventures).
Kwarteng’s mini-budget has seen benefits for investors as the extension means that more capital can be allocated to SEIS-eligible investments per annum (£200,000 up from £100,00). This provides investors with greater scope to benefit from the wealth of tax benefits available via the scheme and can potentially facilitate more considerable investment returns upon exit.
Useful resources for startups:
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