SEIS vs EIS: What’s the difference?
Any business owner or CEO knows that securing investments is crucial for small and medium companies if they want to develop and grow. However, from an investor’s point of view, a company in its early stages can be a risky investment choice if they want to ensure a good return on investment.
Potential risk with smaller businesses doesn’t mean that investors should turn away from these companies. In fact, backing SMEs can be extremely lucrative.
Why invest in small companies?
To encourage investment in small companies, the UK government has created four venture capital investment schemes that have been specially designed to attract investment. They function by offering tax reliefs to individuals who buy and hold new shares, bonds, or assets for a specific period of time.
Each scheme has strict eligibility requirements and the company, investor, and proposed investment must all meet the specified conditions of the chosen investment scheme.
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are two investment schemes helping small companies raise funding for their continued growth and development whilst providing an excellent opportunity for investors. They both function by offering tax reliefs to individual investors who buy new shares in a company, but whether a company qualifies for SEIS or EIS will depend on which criteria it meets.
If you’re wondering ‘What’s the difference between SEIS and EIS?’, you’ve come to the right place. In short, EIS is designed to help certain companies raise money to grow, whereas SEIS helps companies that are just starting to trade.
This article will explore the requirements and limits of each scheme.
The Seed Investment Scheme (SEIS)
Both SEIS and EIS have extensive eligibility criteria, so let’s start with the basics.
To qualify for SEIS, when the shares are issued a company and any of its subsidiaries must:
- Not have gross assets over £200,000
- Have less than 25 full-time equivalent employees in total
- Not have previously carried out a different trade.
- Not be a member of a partnership
If the company is already carrying out a qualifying trade, both the company and any person who transferred it to the company cannot have been doing it for more than two years.
Money raised by a new share must be spent within three years of the share issue (this is longer than under the standard EIS, which is two years). You cannot use the investment to buy shares, unless the shares are in a qualifying 90% subsidiary that uses the money for a qualifying business activity.
A company cannot receive investment under SEIS if it has already used EIS or another venture capital trust.
The Enterprise Investment Scheme (EIS)
A company may be EIS eligible if at the time of investment it has:
- no more than £15 million in gross assets.
- Fewer than 250 full-time equivalent employees.
- been more than seven years since its first financial sale.
Money raised by a new share must:
- Be spent within two years of the investment (or the date you started trading if later).
- Not be used to buy all or part of another business.
- Be used to develop or grow your business.
- Pose a risk of loss of capital for the investor.
SEIS vs EIS maximum investments
Under SEIS, a company can receive a maximum of £150,000 through investments, which will count towards any limits for later investments through other venture capital schemes (including EIS).
Under EIS, a company can receive a maximum of £5 million each year, and a maximum of £12 million in the company’s lifetime (this includes finances gained from other venture capital schemes).
SEIS vs EIS Capital Gains Tax relief
Investors using either SEIS or EIS can benefit from Capital Gains Tax relief on their investments, although the available amount is different under each scheme.
Under SEIS, investors can get (exemption) relief on 50% of their investment capped at £50,000 and through EIS investors can get (deferral) relief on 100% of their initial investment.
With both schemes, gains are exempt from Capital Gains Tax when shares are sold and relief is available for capital losses against income.
SEIS and EIS similarities
Despite differing in their applicability and the amount of tax relief available, shares issued under SEIS or EIS must meet the same requirements.
Both SEIS and EIS investments must be spent on carrying out a qualifying trade, preparing to carry out a qualifying trade, or conducting research and development that’s expected to lead to a qualifying trade. If more than 20% of trade comes from traditional industries like coal or steel production, property development, or financing services, it is unlikely to qualify for either SEIS or EIS.
Under both schemes, if a company does not fulfill their obligations for at least three years after the investment is made, tax reliefs will be withheld or withdrawn from investors. Also, a company cannot control another company other than qualifying subsidiaries or be trading on a recognised stock exchange at the time of the share issue.
To qualify for SEIS a company must be established in the UK, not been controlled by another company since the date of its incorporation, and have no arrangements to become a quoted company or a subsidiary of one.
For EIS, a permanent establishment in the UK is required. It can’t be controlled by another company, have more than 50% of its shares owned by another company, or expect to close after completing a project or series of projects.
If you’re a company looking to use either SEIS or EIS, you can apply for advance assurance from HMRC to see if they think your share issue will qualify before you go ahead with raising your money.
Investing with Films4U
Films4U is a specialised film funding, production, and distribution company using EIS. We’ve been investing in the industry for over 30 years, and haven’t lost money on a film yet. Instead, we’ve consistently returned market-leading profits. This means that our investors are not only seeing an excellent return on investment, they’re benefiting from generous EIS tax reliefs.
To learn more about the benefits of investing in film with EIS tax relief, chat with one of our account managers on 08082 750 904 or register your interest.
The information contained on this website should not be taken as financial advice or as a personal recommendation by Films4U. Before investing you should always seek appropriate legal and financial advice from an authorised person specialising in investments of this kind.