Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) tax relief

What are SEIS and EIS?

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government approved schemes which provide significant tax reliefs to UK tax paying individuals who invest in early stage UK companies by subscribing for shares in such companies. This means that these investors are able to make investments with a lot less risk involved.
 

How can SEIS and EIS help your studio?

For any young business in the games sector, SEIS and EIS are important to understand as the reliefs they offer will often be a key incentive for a potential investor to provide early stage equity investment in your studio.
 

Is the SEIS or EIS investor investing in a special purpose company?

It is becoming increasingly common for studios to set up a special purpose company for each new game project, for reasons relating to the video games tax relief and other commercial reasons. As a practical point, it is important to consider whether the SEIS/EIS investor is investing in a special purpose company that you have established solely to develop and exploit one game, or a company that intends to develop numerous games. This is likely to have a material impact on the deal that you reach with the investor.

If you are seeking SEIS or EIS finance for a special purpose company established to develop and exploit a single game then you should take specialist tax advice because there are some restrictions on the use of SEIS and EIS finance in this context.
 

What are the key points to know about SEIS and EIS?

A summary of the key points is as follows:

Main rules that apply to both SEIS and EIS

  • SEIS and EIS are tax reliefs that benefit the individual investor – not the company receiving finance.
  • Only eligible UK tax paying individuals can benefit from the relief. If you are seeking to raise finance from an individual investor that does not pay tax in the UK or a company or other legal entity, SEIS and EIS relief will not apply.
  • SEIS and EIS reliefs will generally not be available to founders or management of the fundraising company.
  • The investors’ investment must take the form of full-risk ordinary shares (and not the form of debt, convertible debt or other structure).
  • The business that is carried on by the fundraising company must “qualify” under the specific rules (e.g. a video game development company will generally qualify). This is the area that most often requires specialist advice.
  • The shares in the fundraising company that are subscribed for by the investor must be:
    • full risk ordinary shares; and
    • held for 3 years,

or the reliefs will be invalidated.

Main rules that apply specifically to SEIS

  • The fundraising company must have 25 or fewer employees, gross assets of no more than £200,000 and must be no more than 2 years old.
  • The maximum amount a company can raise under SEIS is £150,000 capped at £100,000 per individual investor per tax year.
  • The investor can offset up to 50% of the investment against his/her income tax liability (e.g. for an investment of £100k the investor could offset £50k against its income tax liability, which means only £50k of the investment is at risk, assuming the investor has an income tax liability of at least £50k).
  • No capital gains tax will apply to the sale of the shares in the company.
  • The investor can set off any loss on its investment against its income tax liability.

Rules that apply specifically to EIS

  • The fundraising company must have 250 or fewer employees, gross assets of no more than £15 million and must be no more than 7 years old.
  • The maximum a company can raise under EIS is £5,000,000 capped at £1,000,000 per individual investor per tax year.
  • The investor can offset up to 30% of its investment cost against its income tax liability (e.g. for an investment of £100k it could offset £30k against its income tax liability, which means only £70k of the investment is at risk, assuming that the investor has an income tax liability of at least £30k).
  • No capital gains tax will apply to the sale of the shares in the company.
  • The investor can set off any loss on its investment against its income tax liability.

Advance Assurance
HMRC operates an “Advance Assurance” process for companies seeking SEIS and EIS eligibility through which it will assess a company and business for SEIS or EIS eligibility and, if successful, provide an initial, non-binding, indicative certificate to the company. Although the certificate is of limited legal force, it is frequently requested by more sophisticated angel investors as a condition of their investment. As part of this process, applicant companies typically submit their articles of association and, if relevant, shareholders’ agreement to HMRC and so it is important that companies take legal and tax advice in connection with these documents to ensure that they comply with the SEIS or EIS rules (as applicable).
 

Where can I find out more?

There is a plethora of online guides and resources relating to SEIS and EIS. We suggest looking at the HMRC advice as a starting point, which is available here and here.

The rules are complex so we suggest that you seek specialist advice if you wish to establish an EIS or SEIS.

Feel free to contact Charles Leveque or Mark Phillips for further information about EIS or SEIS.

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