Starting a new business and looking for early stage investment? Or looking to grow your company and need external funding? The government-backed Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) could be the answer.
SEIS and EIS bring together private investors with companies that need funds to scale and grow. It’s a win-win: founders get much-needed funding and investors could get significant tax breaks.
The schemes are growing in popularity, with new figures released by HMRC this month (May) showing a 39% increase in EIS funding in 2021/22. The total investment through the scheme has reached its highest ever level at £2.3billion.
We sat down with Christiana Stewart-Lockhart, Director General of the Enterprise Investment Scheme Association EISA – Enterprise Investment Scheme who says:
When thinking about needing money to grow their business, the initial thought of a lot of founders is to get a business loan. They potentially don’t even consider equity investment as they don’t know where to start. In reality, they could be eligible for SEIS or EIS and we want to raise awareness of what is available.
Christiana Stewart-Lockhart
What is SEIS and who is it for?
The Seed Enterprise Investment Scheme (SEIS) is for earlier stage start-ups. There are conditions on which businesses are eligible, including:
- Must be UK-based
- Must be 3 years or less since first qualifying trade
- Fewer than 25 employees
- Less than £350,000 in gross assets
- Can’t be asset-backed
- Can’t be owned by another company
If you’re an early stage female founder, it’s definitely worth exploring if you’re eligible. Find out more here. And now’s the time: the money invested in SEIS increased 16% in 2021/22, spread across 2,270 companies
Christiana says “There are a lot of added benefits that come with investment through the SEIS and EIS like mentoring, access to different networks. One female founder told me SIES was critical to her growing her business. She raised around £20,000 through SEIS and the angel investor then introduced her to someone who took a 6-figure contract with her business. That’s just one example of the impact of investment through these schemes and how they can add significant value to companies.”
What is EIS and who is it for?
The EIS (Enterprise Investment Scheme) is for small, privately-owned companies, some of whom have already benefited from SEIS. As with SEIS there are conditions on who can use it, including:
- Must be UK-based
- Must be 7 years or less since first qualifying trade
- Fewer than 250 employees (or fewer than 500 for a ‘knowledge intensive’ company)
- Less than £15m in gross assets
- Can’t be controlled by another company
“There is an overall lack of education about the schemes and we’re working hard to change that”, says Christiana. “We know women are less likely to have a background in finance or to have existing connections in the investment community. This means they simply haven’t heard of these schemes. It’s a big challenge because particularly outside London and the south east the awareness of EIS and SEIS is much lower. That’s exacerbated when it comes to female founders. Evidence suggests they are less likely to have heard of these schemes so less likely to be utilising them.”
What are the benefits for investors?
It’s not just entrepreneurs who benefit from SEIS and EIS. Both schemes have lots of perks for investors too.
SEIS
Investors can get 50% initial income tax relief
No Capital Gains Tax or Inheritance Tax to pay
Loss relief means a maximum exposure of 27.5p in the £ for a 45% income tax payer
EIS
30% initial income tax relief for investors
No Capital Gains Tax or Inheritance Tax to pay
Loss relief means a maximum exposure of 38.5p in the £ for a 45% income tax payer
Read the EISA guide for investors here.
“The government recognised that there was an under provision of investment for start ups given their high risk nature. They therefore created the SEIS and EIS to incentivise private investment in this space. The SEIS and EIS offer investors a number of incentives”, explains Christiana. “SEIS is aimed at early stage and so, typically, is associated with the highest amount of risk. But SEIS provides an initial 50% income tax relief, meaning if you were to invest 10k you’d qualify for a £5,000 reduction on your income tax bill. This is pretty significant. Investments through the SEIS are except from CGT and eligible for loss relief. These reliefs combine to dramatically reduce the potential amount you could lose if the start up failed.”
Christiana is keen to see more angel investors getting involved, and adds, “A lot of people perceive an angel investor to be someone who invests £500,000 a year and they may think that’s completely unattainable. However, it’s not just for ultra-high net worth individuals. It’s important to remember that these are high risk, illiquid investments but last year 15% of those investing through the SEIS invested less than £1000[CSL1] . Investments can start at £1,000 (or lower through crowdfunding platforms) which after the 50% SEIS income tax relief is £500. There are a number of great initiatives trying to grow the number of female angels including the UKBAA’s Women backing Women, Mint Ventures and Fund Her North.” It is worth bearing in mind that there is a regulatory framework for angel investing. These rules apply if you are not investing through a financial adviser and we’d recommend that anyone interested look into these.
Why is SEIS and EIS less popular outside London?
While the number of companies receiving funding through SEIS and EIS has increased, its mainly in London and the south east. And this is something our 2023 report identified.
“We worked with The Gender Index to create a filter identifying the female-led companies eligible for the schemes”, says Christiana. “This highlighted that only 10.9% of the eligible UK female-led companies are actually using the schemes to seek equity investment. This figure was 15.8% in Wales, probably due to the involvement of the Development Bank of Wales and the ecosystem, including hubs like Tramshed Tech. These ensure more women are aware of the schemes and can benefit from them.”
EISA are holding events across the home nations this year to raise awareness of the schemes. Christiana adds, “British Business Bank data shows there are quite high correlations in terms of the distance between the investor and investee company. People want to give back and invest in their local communities. If we can grow angels in regions, that should help founders across the whole of the UK”.
Why is there a gender gap in EIS qualifying companies securing funding?
Our 2023 analysis also found a gender gap within EIS qualifying companies that secured funding. Male-led companies capture roughly seven times more secured funding than female-led companies, averaging 70% of the total funding over the two-year period.
“If more female founders knew there was this government scheme – specifically designed to help early stage founders grow their business and incentivise people to invest in businesses just like theirs – I think they’d be more likely to explore that avenue”, says Christiana.
How can I apply for SEIS or EIS?
Want to see if you’re eligible for either scheme? You can check out the EISA guide for founders here.
Click here to read the full article by The Gender Index.
