Spreading the love: Be your investors’ perfect Valentine and share the tax benefits offered by SEIS
If there’s one thing that can’t be questioned, it’s that the UK values its entrepreneurs and start-ups. The Government, to actively encourage private investment into ‘the backbone of the British economy’, offers arguably the most generous tax incentive schemes in the world; with over £1.6bn invested into 30,000 start-ups each year, their success is undisputed and our status as the global leader in technological innovation looks set to continue. The two primary initiatives are the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) and, though both offer extremely generous tax relief, there are some crucial differences.
SEIS focuses on the seed funding round of a very early-stage start-up and allows the company to raise up to £150,000; these investors will then be entitled to a 50% tax relief break – regardless of any marginal rates – in return. As an example, if you’re an early-stage start-up and are looking to raise £150,000 under the SEIS scheme, provided you’re fairly well connected – friends or family for instance – you shouldn’t have too much difficulty in reaching your target.
The next funding round will qualify under the EIS scheme, which offers the lower income tax relief rate of 30%. This is when raising finance starts to become trickier because, as generous as this tax break is, essentially the ‘cream’ of the scheme has been given to those who dug deep at the seed stage. This explains why businesses find this later funding phase more difficult: the second wave of investors is still funding an early-stage business, with the associated high risks of putting one’s cash into a company that may not even be generating any revenues yet, but – crucially – with only 30% relief, as opposed to the 50% offered under SEIS.
However, not many people are aware that there is a tactical opportunity that is beneficial for both the entrepreneur and the investor to offset this quandary: it is possible to share the love around (so to speak) and provide later investors with a chance to benefit from SEIS relief, at the EIS stage. Confused? Consider this example: you’re an early-stage start-up who wants to raise £450,000. You can now offer investors a third of their investment under the SEIS scheme (within the £150,000 limit that you’re allowed to raise in the first year) and two thirds under EIS. This means that if somebody invests £30,000 into your start-up, £10,000 of that amount is eligible for the 50% tax relief and £20,000 is entitled to the 30% of EIS. In practice, this tactic makes it far easier for those seeking funding – beyond the seed round – to encourage later investors, as by dividing the SEIS benefits you’re letting everybody have a piece of the best bits. You’ve shared the love, made your fundraising campaign less difficult and given more people the opportunity to get the best piece of you.
Just in time for Valentine’s Day too.
Need expert help on how to get the best out of the SEIS and EIS tax relief schemes for your start-up? Get in touch with Sarah Friend at BDO here
Now you’ve worked out the tax bit, check out how we can help you with the rest of your fundraising campaign here
To learn more about S(EIS), click here