The United Kingdom (UK) offers a powerful trio of venture capital schemes designed to fuel investment into innovative, high-growth companies. The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs) scheme provide generous tax incentives to attract investment capital for early-stage and scale-up businesses.
The EIS targets investment into higher-risk, small companies with strong growth potential, while the SEIS focuses specifically on seed capital for startups in their earliest stages. VCTs, on the other hand, are publicly traded investment trusts that funnel capital into a range of qualifying, entrepreneurial companies.
While varying in scope, these three initiatives share a common goal – stimulating the flow of investment to the UK's most pioneering enterprises. By offering compelling tax reliefs, they make backing these ambitious ventures more appealing for investors looking to diversify their portfolios.
These venture capital schemes offer several attractive benefits for both companies and investors.
Understanding the tax reliefs
EIS tax reliefs
- Investors can claim 30% upfront income tax relief on investments up to £1 million per tax year, reducing their tax liability significantly
- Any profits realised from the disposal of EIS investments are exempt from capital gains tax, provided the shares have been held for at least three years
- If an EIS investment underperforms, investors can offset any losses against their income tax or capital gains tax liabilities, providing a valuable safety net
- Existing capital gains (on any asset disposal) made one year before or three years after the date of the investment can be deferred or sheltered. The deferred gain will crystalise when the underlying EIS investment is disposed of or if the EIS company ceases to qualify
- In order to receive relief on the capital gains arising on the EIS investment it is essential that the investor is eligible (and claims) income tax relief on the EIS investment
SEIS tax reliefs
- 50% upfront income tax relief on investments up to £200,000 per tax year
- Exemption from capital gains tax on profits from SEIS investments
- Capital gains tax reinvestment relief for investments made in the same tax year, allowing investors to defer capital gains
- Existing capital gains (on any asset disposal) made one year before or three years after the date of investment can be deferred or sheltered, by investing up to 50% of the gain into an SEIS, with a maximum investment of £200,000 per tax year. The deferred gain will crystalise when the underlying SEIS investment is disposed of or if the SEIS company ceases to qualify for SEIS relief
- In order to receive relief on the capital gains arising on the EIS investment it is essential that the investor is eligible (and claims) income tax relief on the EIS investment
VCT tax reliefs
- 30% upfront income tax relief on investments up to £200,000 per tax year
- Exemption from capital gains tax on profits from VCT investments
- Tax-free dividends from VCT investments, providing ongoing tax benefits
Qualifying for the schemes
To be eligible for these tax reliefs, companies must meet specific criteria set by HM Revenue & Customs (HMRC).
For the EIS, key requirements include:
- having a permanent establishment in the UK;
- carrying out a qualifying trade;
- having fewer than 250 employees;
- having gross assets under £15 million before investment;
- not being listed on the main LSE market; and
- not having raised over £12 million from EIS/SEIS/VCT sources.
For the SEIS, companies must:
- have less than 25 employees;
- have assets under £200,000;
- be carrying out a new qualifying trade; and
- issue shares to raise money for a qualifying business activity.
For VCTs, the trust itself must:
- be UK resident;
- have at least 70% of investments in qualifying holdings; and
- derive no more than 15% of its income from non-qualifying holdings.
Additionally, the companies that VCTs invest in must meet criteria similar to the EIS, including having less than 250 employees and gross assets under £15m.
The importance of advance assurance
While these venture capital schemes provide compelling tax incentives, ensuring compliance with each scheme's rules is crucial to benefiting from the respective reliefs. This is where advance assurance from HMRC becomes invaluable across the EIS, SEIS, and VCT initiatives.
For the EIS and SEIS, advance assurance gives potential investors confidence that their investment is likely to qualify for the respective income tax, capital gains tax, and reinvestment reliefs offered by those schemes.
For VCTs, advance assurance provides assurance to the trust managers that the companies they plan to invest in are likely to meet the stringent qualifying criteria, allowing the trusts to maintain their VCT status and pass on the tax benefits to investors.
The advance assurance process requires a comprehensive understanding of each scheme's complex regulations. Companies must submit extensive documentation, including detailed business plans, financial projections, legal documents, ownership structures, and information on potential investors (where applicable).
HMRC meticulously reviews these applications to ensure all conditions are met, such as assessing the risk to capital for EIS/SEIS investments and verifying the qualifying trade status.
If granted, HMRC issues a statement confirming the investment's likely eligibility based on the information provided. However, it's crucial to note that advance assurance does not guarantee relief. Companies must still submit compliance statements after investments occur and maintain adherence to each scheme's rules, as any changes could invalidate the advance assurance.
By securing advance assurance, companies increase their chances of attracting investors and fund managers who value the tax advantages offered by these venture capital schemes.
In addition to the above it is important to note that the conditions applying to the investor are equally important. For example, with EIS, the income tax relief cannot be claimed where the investor is a director, but qualifying payments are permitted. With SEIS, the investor is permitted to be a director.
Another source of funding eligible for relief would be Business Investment Relief (BIR) for non-UK domiciles. In essence, non-UK domiciled individuals may bring funds into the UK for the subscription of shares, and provided the funds are used within 45 days, the inward flow of funds is not classed as a taxable remittance.
How Hawksford can help
At Hawksford, we specialise in assisting companies with all aspects of the EIS, SEIS, and VCT processes – from initial planning, company incorporation to ongoing corporate services and compliance. Our team of experienced professionals can guide you through the intricate requirements and documentation needed for a successful advance assurance application across these schemes.
We begin with an initial in-depth consultation to understand your business, its activities, and funding requirements. This allows us to assess your eligibility for the appropriate venture capital scheme(s) and develop a tailored strategy.
Following this first stage, we will conduct a thorough review, ensuring your company meets all the necessary criteria outlined by HMRC for the chosen scheme(s). The next step is to meticulously compile all required documentation, including detailed business plans, financial projections, legal documents, and investor details (if applicable).
We will then submit the advance assurance application to HMRC on your behalf and act as your representative throughout the process, liaising with authorities and addressing any queries or requests.
If your application is successful, we provide guidance on maintaining compliance with the scheme rules, monitoring any changes that could impact your eligibility, and assisting with investor certificate issuance.
By partnering with Hawksford, you can leverage our extensive knowledge and experience in navigating the complexities of these schemes.
Before the application process starts, we will handle all aspects of the company incorporation process, so your entities are up and running as soon as possible. We then look after the fundamentals so that everything is in good standing, year after year.
Regardless of the scale of your needs, we provide quality services, delivered professionally every time, so you can focus on what matters most to you.
Contact our experts today and lets us help you achieve your business ambitions.
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