Often overlooked by entrepreneurs, the Enterprise Investment (EIS) and Seed Enterprise Investment (SEIS) schemes can be a big draw for potential investors. If you’re not familiar with the schemes, EIS aims to encourage investment in small trading companies in the hope that they will grow and create
employment, as potentially high-risk investments the tax breaks offered are very attractive to investors. Whereas SEIS is designed to help small, early-stage businesses to raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies.
Although seeing if your business qualifies for either scheme can sometimes seem too complicated or not the best use of your time, you need to ask yourself how much you want an investor on board, and would qualifying for either scheme help me secure investment? More often than not, the answer to that question is yes!
EIS and SEIS can make a significant difference for entrepreneurs trying to gain business funding. For instance, if you don’t bother to look into EIS or SEIS for your business, you pitch for funding and you’re up against a company which is equally interesting to investors but who has qualified for EIS or SEIS, who is the business angel likely to invest in?
Example of EIS
Michael invests £50,000 in ABC Ltd company. He will receive £15,000 of tax relief on investment. In 5 years he sells the shares for £10,000. On sale, he will have a loss of £50,000 less £15,000 less £10,000 equals £25,000 on which he will get up to 45% income tax relief: a further £11,250. Thus, his net loss will actually be £13,750 rather than £40,000.
James invests £50,000 in DEF Ltd, getting £15,000 of relief. In 5 years he sells the shares for £200,000. As the proceeds will be tax free, he will make an overall post-tax profit of £165,000.
With EIS and SEIS, there is a huge reduction to the risk in investing in a business for the angel investor, so although the process may seem complex, the schemes are an important means by which entrepreneurs can attract investment.
As you might expect, to qualify for EIS or SEIS, there are a list of conditions that must be met but we can help you to check whether your business would qualify for either scheme, so it really doesn’t have to be another headache for you to worry about. The HMRC Advance Assurance Application enables businesses to get advance assurance on whether or not HMRC would regard the shares as qualifying for EIS or SEIS. This is a great opportunity to check that your company qualifies and is a fantastic incentive for potential investors. Click here for the HMRC Advance Assurance Application form. It looks impenetrable but once again we can advise on the best way forward.
It’s a more crucial time than ever to get your business approved for either scheme, as the end of the tax year is coming up so more business angels will be looking to invest to save tax.
We always recommend speaking to an expert to fully understand the benefits and conditions that come with both schemes, click here to find out more about our SEIS and EIS services.
Its not the number one angels look for in establishing whether or not to invest, but if 2 deals look similar and one has already got EIS clearance, this deal will stand out.
A version of this article originally appeared earlier this year on AngelsDen which has successfully been helping businesses get funding for over six years. Recently the UK based company launched an online crowdfunding platform. The company was co-founded by Bill Morrow and Lois Clark.