The UK tech industry boasts remarkable numbers. UKTN reported that in early 2022, the industry’s value surpassed $1 trillion (£764 billion), ranking the industry the third largest in the world, behind just the US and China. To give a sense of scale, the UK tech industry is worth over double that of Germany and almost five times larger than France. Undoubtedly, one of the biggest drivers of this increased value of the UK tech sector is access to funding.

However, as many tech founders will know, it’s a more difficult time to raise funds today than it was in early 2022 or the year prior to that. Therefore, it’s crucially important that tech founders don’t make this process more difficult than it needs to be by not being aware of the UK’s venture capital schemes, namely Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). These schemes are hugely popular with investors, with 3,755 companies raising £1,658m under EIS and 2,065 companies raising £175m under SEIS in the 2020-21 tax year according to HMRC statistics.

Therefore, within this blog, we’ll explain what these schemes are, the recent changes to them and how to apply:

EIS & SEIS: The Basics

EIS and SEIS are designed to encourage investments in early-stage, high-growth companies by providing attractive tax incentives to investors. The UK’s tech industry especially is home to many companies with the potential for high growth if they can unlock this potential through investment and these schemes could offer a key to attracting this investment.

EIS, introduced in 1994, primarily targets growing companies, while SEIS, launched in 2012, focuses on earlier-stage seed-stage investments. If a company has applied for EIS & SEIS status, they allow investors to benefit from various tax reliefs, which we will discuss in the next sections.

EIS Explained:

Investors are incentivised to invest in companies with EIS status due to tax reliefs that can be obtained, such as:

  • Income tax relief of up to 30%
  • Tax-free gains when shares are sold, provided they are held for 3 years
  • Loss relief
  • Capital gains deferral
  • Inheritance tax relief
  • Annual investment limit of £1m (or up to £2m if the excess investment is in ‘Knowledge Intensive Companies’)

However, companies should be aware that there are conditions to qualify for EIS status, such as the key conditions included below, the company must:

  • Fundraise a maximum of £12m (limited to £5m per year)
  • Receive the investment within 7 years of their first commercial sale (or 10 years for Knowledge Intensive Companies)
  • Have gross assets worth no more than £15m
  • Employ fewer than 250 full-time staff
  • Operate a qualifying trade

For more information on reliefs, limits, and conditions, professional guidance is recommended.

SEIS Simplified:

SEIS, on the other hand, offers even more generous tax reliefs for investors, given the higher risk associated with early-stage investments:

  • Income tax relief of up to 50%
  • Tax-free gains when shares are sold, provided they are held for 3 years
  • Loss relief
  • Exemption of up to 50% of gains when they are reinvested (instead of capital gains deferral)
  • Inheritance tax relief
  • Annual investment limit of £200k from April 2023

However, whilst the reliefs on offer are more generous, there are stricter requirements associated with SEIS. There were also some updates made to the SEIS rules after the last Mini-Budget, so now from April 2023, eligible companies can raise up to £250k, provided they:

  • Have been trading for less than 3 years
  • Have gross assets worth no more than £350,000

Applying for EIS/SEIS

Both EIS and SEIS allow companies to apply for ‘Advance Assurance’ from HMRC before raising funds. If accepted, this confirms that, based on the information provided, the company’s upcoming share issue would qualify for EIS/SEIS relief.

After the shares have been issued, companies must submit another application to HMRC, regardless of whether advance assurance was sought. If all requirements are met, HMRC will confirm the relief, enabling EIS/SEIS certificates to be provided to investors.

Seeking advice?

The Smart Accountants’ Tech & High Growth department has supported numerous tech businesses at various growth stages, including through EIS/SEIS fundraising. If you would like to discuss this or any other ways we can assist you, please contact us.