Tax

Recently published data by the UK tax authority (“HMRC”) confirms that investments into UK enterprise investment schemes (“EIS”) and seed enterprise investment schemes (“SEIS”) have increased to record levels in the last tax year. The data confirms that, in the 2021-22 tax year:

• 4,480 companies raised £2.3bn under EIS, representing a 39% increase on the prior year; and
• 2,270 companies raised £205m under SEIS, representing a 16% increase on the prior year.

In addition to increases in amounts raised for both schemes, there was a rise in the number of companies accessing the schemes.

The data also highlights recent increased approvals from HMRC following advance assurance requests: in the case of EIS, the approval rate has increased from 73% to 81% and, in the case of SEIS, from 72% to 82%.

The aim of each of the schemes is to encourage investments in qualifying early stage businesses by offering individual investors both income tax and capital gains tax reliefs.

Given the potential to attract greater investment as a result of these reliefs, it is perhaps unsurprising that qualifying businesses often consider whether either EIS or SEIS would be available to their investors. However, in order to qualify for the schemes there are a number of detailed requirements that need to be met and, if any one of those requirements is not met, the business will not qualify for the regime and investors will be unable to access the income tax and capital gains tax reliefs.

The timing catch

One critical requirement that often catches investors out relates to the timing of the investment.

As noted, the purpose of EIS and SEIS is to encourage investment in early stage businesses. Consistent with that objective, each of the regimes has time restrictions for the investment:

• In the case of EIS, relief will, generally, only apply where the investment is made within seven years of the first commercial sale; and
• In the case of SEIS, relief will only apply where the company’s qualifying trade commenced in the three years before the investment.

It is a question of fact whether the business will be timed out from qualifying for EIS and/or SEIS based on these tests. For SEIS, if the business is timed out, investments will not qualify for the regime. However, for EIS it is not necessarily game over; there are two key exceptions to the seven year rule:

• Except in specific circumstances, for knowledge-intensive companies the time period is extended to ten years from the first commercial sale, or, if the company chooses, ten years from when the company’s annual turnover exceeds £200,000.
• Where the business is entering a new product or geographic market, or secures certain follow-on funding, an investment outside of the seven year window may still be able to benefit from EIS subject to the fulfilment of certain additional requirement.

Again whether any of these exceptions are available will be a question of fact. However, if those exceptions do not apply, the business will be timed out and investments into the business will not qualify for the regime.

Final remarks

The data from HMRC is perhaps unsurprising; both EIS and SEIS offer attractive reliefs from income tax and capital gains tax for individual investors. Whether the upward trend in EIS and SEIS investment will continue in the current economic climate remains to be seen. Working through the plethora of qualifying conditions is a time consuming, potentially daunting, exercise for any business. But, remember, don’t take too long; the EIS and SEIS clocks are ticking!