Tax & admin · 25 November 2016

What are the SEIS and EIS startup tax breaks?

Money and cacl
It can be difficult to know which tax breaks are available to you as a startup

Small businesses across the country will have been keenly tuning into Philip Hammond’s maiden Autumn Statement, writes Crowdcube co-founder Luke Lang.

It was the first Autumn Statement under Theresa May’s leadership, and for Hammond, the first opportunity to outline the government’s priorities for startup tax breaks for the first time since the Brexit vote in June.

When it comes to startup tax breaks of course, the Autumn Statement the moment when every small business owner pricks up their ears.

Everyone loves a tax break, and Theresa May has already outlined plans for the UK to have the lowest corporation tax among the 20 largest economies in the world, with plans to cut it from the current 20 per cent to 17 per cent by 2020.

And there are rumours of further cuts, pushing the corporation tax rate down to 15 per cent, or possibly even lower.

May also addressed the CBI this week to talk about supporting innovative British firms through our tax system. The premise is that the current government is solidly pro-innovation – great news when so many British companies are at the forefront of the fintech movement.

But don’t forget that for small innovative businesses looking for investment, and also potential investors looking to put money into these businesses, there are already generous tax breaks available.

It’s worth knowing that any company raising finance on Crowdcube can apply for tax relief via two existing schemes – the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

Understanding the topic of tax relief can be difficult at the best of times, even with a decent accountant, so this will help guide startups and small companies through the basics of both schemes.

What are SEIS and EIS?

The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are government schemes designed to encourage investment into seed, startup and growth stage companies by offering a range of startup tax breaks to investors who purchase new shares in those companies.

EIS – Enterprise Investment Scheme

The EIS is designed to help smaller, higher-risk companies raise finance by offering startup tax breaks on new shares in those companies that qualify.

For the investor, it’s a tax efficient way to invest in small companies. It is aimed at wealthier, sophisticated investors. People can invest up to £1m in any tax year and receive 30 per cent tax relief.

However, they are locked into the scheme for a minimum of three years. EIS seeks to encourage investment into unlisted companies.

SEIS – Seed Enterprise Investment Scheme

The SEIS is an incredibly generous derivative of the EIS and was introduced in April 2012. Its aim is to encourage seed investment in early-stage companies.

Investors, including directors, can receive initial tax relief of 50 per cent on investments up to £100,000 and capital gains tax (CGT) exemption for any gains on the SEIS shares. The maximum amount to be raised for each company is £150,000.

Companies raising money on Crowdcube can apply for one or both tax reliefs, which gives eligible investors up to 50 per cent relief on SEIS investments and 30 per cent on EIS eligible investments. Companies with both tax reliefs listed, can offer SEIS up to the first £150,000 of investment raised and EIS thereafter (until closed to further investment).

It is important to note that if a company is raising finance with both forms of tax relief, SEIS is available on a first-come-first-basis (up to the £150,000). The tax relief is allocated immediately and confirmed to all eligible investors once the investment transaction is complete.

Both investors and businesses should also be aware that have to be a UK taxpayer in order to claim SEIS or EIS relief.

In addition, you will not be eligible for SEIS or EIS tax relief if you are connected with the company. In all cases, if the eligibility of these tax reliefs are in any doubt, investors should seek independent advice.

A useful resource is HMRC’s guidance on EIS and SEIS.   

Luke Lang is co-founder at Crowdcube and one of Business Advice’s 30 key Small Business Decision Makers 2017.

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ABOUT THE EXPERT

Darren Westlake is the co-founder and CEO of Crowdcube, an online platform that enables startup, early and growth-stage businesses, from a range of sectors, to raise finance with the added benefit of being backed by the crowd.

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