How do SEIS and EIS tax reliefs work for UK startups?

SEIS and EIS are UK government schemes that offer tax reliefs to individual investors who buy new shares in qualifying early-stage companies. They reduce the investor’s income tax bill and provide protection against losses, making it more attractive to fund startups and e-commerce sellers at the seed stage.

Founders raising early investment need to understand how the schemes work, what investors can claim, the compliance requirements and the steps involved so the company remains eligible. Rules, limits and qualifying criteria change, so always check the latest details on GOV.UK and with HMRC before proceeding.

What are the SEIS and EIS schemes?

The Seed Enterprise Investment Scheme (SEIS) targets very early-stage companies, while the Enterprise Investment Scheme (EIS) supports slightly larger or more established early businesses. Both encourage individuals to invest in higher-risk startups by offering tax incentives.

Investors receive income tax relief on the amount invested and can claim capital gains tax relief or loss relief in certain circumstances. Companies must meet specific criteria around trading activity, permanent establishment in the UK, and the type of shares issued. Only new ordinary shares qualify; the money must be used for a qualifying business activity within a set period.

Investor tax incentives under SEIS and EIS

Under these schemes investors can reduce their income tax liability for the tax year in which they invest. The relief is a percentage of the investment amount, subject to annual limits that change over time. Any unused relief can sometimes be carried back to the previous tax year.

Investors may also benefit from capital gains tax relief on gains made when they eventually sell the shares, provided the shares are held for the required minimum period. If the investment results in a loss, investors can offset that loss against other income or capital gains, reducing their overall tax bill. These incentives aim to balance the high risk of investing in early-stage companies.

Exact percentages, annual investment caps and qualifying periods vary, so investors and founders should always refer to the current HMRC guidance and GOV.UK pages before making or accepting investments.

Limits and eligibility for companies and investors

Companies must be unquoted at the time of the share issue and cannot already have received investment under certain other schemes beyond permitted amounts. There are limits on the total amount a company can raise under SEIS and EIS combined, and on the age of the company when it first receives funds. The business must carry out a qualifying trade; certain activities such as property development, financial services or legal services are excluded.

Investors must be independent from the company; directors and employees are generally not eligible unless they meet narrow exceptions. The investor cannot be connected to the company through control or substantial shareholdings before the new investment. Limits on how much an individual can invest each tax year also apply and these figures are updated periodically.

Because limits and qualifying conditions change, founders should check the latest thresholds on GOV.UK and confirm eligibility with an accountant or HMRC before approaching investors.

Compliance steps when raising investment under SEIS or EIS

1. Confirm the company meets all qualifying criteria including trading status, UK permanent establishment and share structure. Issue only new ordinary shares that carry no special rights.

2. Prepare a business plan and financial forecasts showing how the invested funds will be spent on qualifying activities within the required timeframe. Keep clear records of use of funds.

3. Obtain advance assurance from HMRC before issuing shares. Submit form EIS1 or SEIS1 along with supporting documents. HMRC reviews the application and, if satisfied, issues a letter of assurance.

4. Once shares are issued, submit the compliance statement (EIS1 or SEIS1) to HMRC within the permitted period. HMRC then issues EIS3 or SEIS3 certificates to investors so they can claim relief on their self-assessment tax return.

5. Maintain records for at least the minimum holding period required for relief. Notify HMRC of any changes that could affect eligibility, such as a change of control or cessation of qualifying trade.

Practical examples and reasoning for early-stage founders

An e-commerce founder building an online marketplace might raise £150,000 from several individual investors under SEIS. The company must demonstrate the funds will be used for product development, marketing and stock rather than property or non-qualifying activities. Investors will want to see the advance assurance letter before committing funds.

Reasoning: obtaining advance assurance reduces the risk that HMRC later rejects the investment. It also reassures investors that the company has done the necessary checks. If the company later raises a further round under EIS, founders must ensure the total raised does not exceed the combined scheme limits and that previous SEIS funds were used correctly.

Keep detailed spreadsheets showing monthly spend against the business plan. This helps during any HMRC enquiry and demonstrates compliance. For an online seller of physical goods, typical qualifying costs include website development, inventory systems and digital marketing, provided they support genuine trading activity.

Common pitfalls and how to avoid them

Many founders issue different classes of shares or give investors special rights that disqualify the investment. Stick to new ordinary shares with standard rights. Another frequent error is using funds for non-qualifying purposes such as repaying loans or acquiring another business outside the permitted rules.

Founders sometimes wait until after the investment to apply for advance assurance, which can delay or prevent investors claiming relief. Apply early. Failing to submit the final compliance statement on time also blocks investor claims.

Keep investor agreements simple and avoid terms that create a connection between investor and company that breaches independence rules. Review all documents with an accountant experienced in EIS and SEIS before signing.

Where to get help and next steps

Start by reading the detailed guidance on GOV.UK under the sections for SEIS and EIS. Download the latest forms and notes from HMRC. Speak to a qualified accountant or tax adviser who regularly handles early-stage funding rounds. They can help prepare the advance assurance application and ensure records meet HMRC standards.

Companies House must be kept up to date with share allotments and any changes to the company’s articles. Consider joining a recognised startup incubator or accelerator that understands these schemes. Loomworks in West Yorkshire offers selected founders free desks, a registered address and mentoring with no fees or equity taken, which can provide practical support while you focus on compliance and growth.

Finally, maintain open communication with investors about the compliance process. Transparent reporting builds trust and makes future funding rounds easier.

Frequently asked questions

Can I use SEIS and EIS in the same funding round?

A company can raise under SEIS first and then under EIS later once it has used the initial funds and grown. You cannot usually combine both schemes in a single share issue. Check current GOV.UK rules because the order and limits are strictly controlled.

How long must shares be held to keep the tax relief?

Investors must normally hold the shares for a minimum period, often three years, to retain the full income tax and capital gains tax relief. Selling earlier can trigger a clawback of the relief. Exact periods change so refer to the latest HMRC guidance.

Do I need advance assurance from HMRC?

While not strictly mandatory, obtaining advance assurance before issuing shares is strongly recommended. It gives investors confidence and reduces the chance of HMRC rejecting the claim later. The process involves submitting detailed information about the company, its trade and intended use of funds.

What records should I keep for SEIS or EIS compliance?

Maintain clear records of how every pound raised is spent, business plans, board minutes, shareholder agreements and correspondence with HMRC. Keep evidence that the company continues to meet the qualifying trade rules throughout the compliance period.

Can non-UK residents invest under these schemes?

The schemes are open to UK taxpayers. Non-residents may be able to invest if they have UK tax liability against which to claim the relief. Most investors are UK resident individuals. Always confirm current eligibility on GOV.UK.