Investing in small young companies is a risky business. Many will not succeed; most shall have to overcome lots of difficulties to prosper. In the case of the UK, and according to Statista. From 2017-2020, only 4.3% of SMEs (around 12,000) had high growth (that is, their businesses grew by more than 20% a year). London was the region with the largest number of high-growth businesses (5.5%), whereas Scotland had the lowest rate of growth (3.7%).
In order to help small companies overcome similar problems, and as a way to support seed-stage companies in the UK and increase their investment rates, the UK government launched four venture capital schemes to diminish the risks of investing in this type of companies, being the most popular and successful ones the SEIS scheme (launched in 2012) and the EIS scheme (launched in 1994).
Although there has been some uncertainty about the new measures that could be implemented within these schemes, the UK government has finally approved the new changes that will come into effect in April 2023.
The Seed Enterprise Investment Scheme (SEIS) aims at boosting the economic growth in the UK by offering tax benefits to those investors investing in seed-stage companies across the UK. Currently, this scheme is one of the most important and revered government-backed schemes created. Through this scheme, and before the changes of 2023, investors could receive an initial tax relief of 50% on investments of up to £100,000. In addition, they could also receive Capital Gains Tax (CGT) exemption for any gains on the SEIS shares. The maximum amount to raise through SEIS investments was £150,000 in the lifetime of a company, and funds must be spent within two years of investment. However, now these limits have been increased and will come into force from April, 6 2023.
The Enterprise Investment Scheme (EIS) was designed to support SMEs in growing their businesses. To achieve that objective, the UK government decided to help SMEs raise money by offering tax reliefs of 30% to investors acquiring shares. This way, SMEs can raise up to £5 million each year, with a limit of £12 million in the company’s lifetime, and funds must be spent within two years of investment.
What kind of companies do SEIS/ EIS support?
Image by Rudy and Peter Skitterians in Pixabay
Although both schemes are quite similar, we can also find some differences among them. For example, SEIS supports very early-stage (seed-stage) companies, while EIS supports growth-stage SMEs. In addition, EIS offers income Tax relief of 30%, while SEIS offers 50% aiming to provide a stronger boost when companies face more difficulties in raising capital, that is, in their earlier stages. As a result, there are some differences regarding the eligible companies for each scheme:
Eligible companies for SEIS
SEIS-eligible companies must be younger than 2 years, have less than 25 employees, and must have no more than £200,000 gross assets.
Eligible companies for EIS
In order to apply for the EIS scheme, companies must be younger than 7 years, have less than 250 employees, and must have no more than £15m gross assets.
Eligible companies for SEIS / EIS scheme
To apply for both schemes, companies must fulfill some requirements:
-They must be UK-based,
-They must not be trading on a recognized stock exchange,
-They cannot have plans to be a quoted or a subsidiary company,
-They cannot control another company,
-They cannot have been controlled by another company.
SEIS changes for 2023
Formally approved in November 2022, the UK government will implement some improvements in the SEIS scheme that will become effective in April 2023. These changes include:
-Raising the total investment to £250,000,
-Companies can spend the funds within three years,
-Raising the max gross assets to £350,000,
-Raising the individual investment per year to £200,000.
-The Income Tax additional rate threshold (ART) will be lowered from £150,000 to £125,140.
From 2021-2022, SEIS received a total of 2,750 AAR applications, 72% (1,970) of which have been approved. However, the number of approved applications has decreased compared to 2020-2021, when SEIS received 2,780 applications and 81% (2,245) were approved, which represents a decrease in successful applications of 9% in a year.In the case of EIS, from 2021-2022 EIS received a total of 3,445 AAR applications, from which 73% were approved. There has been an increase in the number of applications from 2020 to 2021 (when 3,080 AAR applications were received), of which 77% were successful.