The UK tech industry can certainly put up some impressive figures. In early 2022, it was reported by UKTN that its value had passed $1 trillion (equivalent to £764 billion). Only the US and China had previously reached this impressive milestone. To put these figures into perspective, the value of the UK tech industry is more than double that of Germany and nearly five times larger than France and Sweden.
Whilst the UK’s tech industry is certainly a goliath in terms of value, this doesn’t mean to say that all investors are scrambling around to throw their money into early-stage tech businesses. Whilst all investments come with risk, it’s widely accepted that whilst investments into earlier-stage businesses can offer the potential of high returns, they also have a higher risk of failure.
Therefore, it’s understandable that these types of investments can make investors more nervous, especially in the current economic climate. However, fortunately, the UK has two venture capital schemes that prove particularly popular with investors, whether this is direct, through investment funds or a crowdfunding platform…
What is EIS?
The Enterprise Investment Scheme (EIS) was introduced in 1994 to help growing companies raise funds by providing tax relief to investors. This tax relief is intended to incentivise investors to make these higher-risk investments into unlisted companies.
From an investors perspective, whilst there are limits and conditions to receiving tax relief, the types of tax reliefs that an investor could receive include:
- Up to 30% income tax relief
- No tax on gains when shares are sold providing shares are held for 3 years
- Loss relief
- Capital gains deferral
- Inheritance tax relief
What are some of the headline conditions from a company perspective? Well, eligible companies can raise a maximum of £12m (and up to £5m each year) but they must:
- Receive the investment within 7 years of their first commercial sale
- Have gross assets worth no more than £15m
- Have less than 250 full-time employees
- Have a qualifying trade
However, full details on reliefs, limits and conditions should be sought.
What is SEIS?
18 years after the launch of the EIS, the SEIS (Seed Enterprise Investment Scheme) launched which was aimed to incentivise investments into even earlier (seed) stage investments. Whilst this is a very similar concept, there are some key differences.
For investors:
- They can get up to 50% income tax relief for investors (a higher relief to reward a higher risk)
- They can get an exemption of up to 50% of gains up to the extent of the gains that they reinvest (as opposed to a capital gains deferral)
- They have an annual investment limit of £200k from April 2023 (the 22/23 limit is £100k)
The Mini Budget saw some updates to the SEIS relief criteria for companies which survived the U-turn announcements, so the updated key differences are covered below:
- Eligible companies can raise up to £250k from April 2023 (current 22/23 limit is £150k) but they must:
- Have been trading for less than 3 years from April 2023 (or 2 years for 22/23)
- Have gross assets worth no more than £350,000 from April 2023 (or £200k for 22/23)
(S)EIS’s popularity in the tech industry:
Nearly three decades on from when it was introduced in 1994, the EIS is still extremely popular with 3,755 companies raising £1,658m of investment under EIS in the 2020-21 tax year as per HMRC reports. This scheme is especially popular in the tech industry, with 34% of the funds raised (£571m) in 2020-21 by companies in the information and communication sector. Whilst funds raised in 2020-21 represented a 12% drop from 2019-20, likely due to the Covid-19 pandemic, EIS investment rebounded in the last quarter of 2020-21 to above that raised in the same quarter the previous year.
SEIS is not as commonly utilised as EIS due to the earlier-stage eligibility requirements but this still saw 2,065 companies raise a total of £175m in 2020-21 (vs the £1,658m for EIS). Of these, 1,660 companies were raising funds, worth £154 million, under SEIS for the first time.
How can businesses apply for EIS/SEIS?
Pre-Raise - for both EIS and SEIS, it’s possible to submit an application for ‘Advance Assurance’ to HMRC, which if accepted, effectively confirms that based on the information provided within the application, the company’s upcoming share issue would qualify for EIS/SEIS relief.
Post-Raise – regardless of whether advance assurance was sought, once the shares are issued to the investors, another application must be made to HMRC. Providing all requirements are satisfied, HMRC will then confirm the relief so that EIS/SEIS certificates can be supplied to the investors.
Need advice?
At UHY (East), our Tech & High Growth department have supported many tech businesses at various stages in their growth journey, including through EIS/SEIS raises. If you would like to discuss this or any other ways we can support you, please contact James Foster at j.foster@uhy-uk.com or your usual UHY advisor for further advice.
Sources: here.
