SEIS vs EIS explained: key differences and how each scheme works

Raising equity can be difficult when you are starting out. The UK’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) can help by offering investors tax relief when they buy shares in your company.

But how does each scheme work, how do they differ, and how do you apply? We explain what you need to know.

Key takeaways

• SEIS and EIS attract investors by offering tax relief on new shares. You raise money by selling equity, not by borrowing through a loan

• You must meet the risk-to-capital condition. That means raising money for real growth and accepting genuine investor risk 

• You can only spend the money on a qualifying trade, when preparing to trade or on R&D. You can’t use funds to buy another business

• SEIS funds must be used within three years of the share issue. EIS funds must be used within two years of the share issue or from the start of trading, whichever is later

• If you plan to use both, issue SEIS before EIS. You cannot issue SEIS after issuing EIS shares

• Advance Assurance from HMRC is optional, but often helps to close a round of fundraising by reassuring investors that they will be eligible for tax relief

• After the round of fundraising is complete, file forms SEIS1 or EIS1, and then issue form SEIS3 or EIS3 so investors can claim relief

Read the rules in full at GOV.UK SEIS and GOV.UK EIS.

What is SEIS and how does it work?

With SEIS, you raise money by selling brand-new ordinary shares to investors. To qualify, the shares must be full risk, which means they are not redeemable, carry no special rights over your assets or dividends, and come with no guarantees. 

Investors must also pay in cash (in full) at the time the shares are issued. For example, if you issue 10,000 shares at £1 each, the investor will transfer £10,000 to the company on issue.

To qualify under SEIS, your company must be based in the UK (or have a permanent establishment there), be carrying out a new qualifying trade, and meet the age, asset, and employee limits at the time the shares are issued.

You are subject to the following limitations:

• Company limits – The firm’s gross assets must be at or below £350,000, and you must have no more than 25 employees

• Age – The new qualifying trade must not have been undertaken for more than three years by your company or a predecessor

• Status – The company is not listed on a stock exchange, has no current plans to become so, and is not controlled by another company. Subsidiaries must also qualify

• Use of funds – The business must spend the funds raised on a qualifying trade, preparing to trade, or R&D that is expected to lead to a qualifying trade. You must spend the money within three years

• Risk to capital – The investment should support long-term growth and carry a real risk of loss. You cannot include arrangements that protect investors or allow early withdrawal

• Compatibility – You cannot use SEIS if you have already raised under EIS or a venture capital trust

After issuing the shares, you must send HMRC a compliance statement. You can submit form SEIS1 when one of two things is true: either you’ve traded in the qualifying trade for four months, or you’ve spent 70% of the raised funds. If HMRC agrees you meet the criteria, it sends SEIS3 certificates with a unique reference so that investors can claim relief.

What is EIS and how does it work?

EIS suits companies that are beyond the very early stage and need larger rounds of funding. Under EIS, you can raise up to £5 million in any 12-month period. You are also limited to up to £12 million over the company’s lifetime, including amounts raised under other venture capital schemes. You usually need to raise EIS within seven years of your first commercial sale. 

Your business must comply with the following:

• Company limits – The firm must have gross assets of no more than £15 million before the issue and £16 million immediately after. You must also have no more than 250 employees

• Status and control – The company is not listed on a stock exchange and is not controlled by another company

• Qualifying trade – The company (or group majority) must carry out a qualifying trade

• Use of funds – Raised funds must be spent on a qualifying trade, on preparing to trade within two years, or on qualifying R&D. The money must support growth or development and pose a genuine risk of loss. You cannot use funds to buy another business

• Age flexibilities – If you didn’t raise risk-finance in the first seven years, you can still qualify in specific cases (for example, entering a new product or geographic market with funding worth at least 50% of your five-year average turnover)

After you issue the shares, you should then submit form EIS1. You can do this once you have carried out the qualifying business activity for four months. If HMRC agrees, it issues EIS3 certificates, allowing investors to claim tax relief on the investment. If you no longer meet the EIS conditions later on, you must tell HMRC within 60 days.

Knowledge-intensive companies (EIS)

If your business carries out significant research, development or innovation, you may qualify as knowledge-intensive. This can relax some EIS rules, including the usual age window and certain company and investor limits. You will need to prove this in your application.

SEIS vs EIS at a glance

Which scheme is right for your business?

• Pre-revenue or just starting to trade – If you’re building your first product, hiring your first team, or moving from prototype to market, SEIS may be the better fit because of the tighter size and age limits, and the £250,000 cap

• Post-revenue or scaling – If you’re growing customers and headcount, expanding into new markets, and needing a larger round, EIS often fits because of the higher annual and lifetime caps, and the two-year spend requirement

• Using both – Many companies raise under SEIS first, then follow with EIS. You must issue SEIS before EIS. SEIS fundraising also counts towards overall risk-finance limits

If you are weighing up your options, our guides on startup funding, sources of funding and venture capital can help you compare routes.

Eligibility and excluded activities

Most trades qualify, but HMRC excludes certain activities – for example, banking, insurance, financial services, property development and leasing. HMRC treats excluded activities as substantial if they make up more than 20% of the company’s trade. Check the lists on GOV.UK SEIS and GOV.UK EIS before applying.

Both schemes require you to meet the risk-to-capital condition. HMRC looks at your sources of income, assets, group relationships, use of subcontractors and how you market the investment. The investment should support permanent growth and carry a genuine risk of loss for investors.

How to apply and get Advance Assurance

Most founders start by applying for Advance Assurance with HMRC. This is optional, but it can give investors confidence. Include your business plan, financial forecasts, latest accounts, how you meet the risk-to-capital condition, what you will spend the money on, and any changes since a prior assurance. If you need a hand with planning, see how to write a business plan and how to get funding for a business.

After you close the fundraising round:

• Issue full-risk ordinary shares 

• Complete the compliance statement (SEIS1 or EIS1)

• Send the compliance statement to HMRC. If HMRC agrees, it issues SEIS3 or EIS3 certificates with a unique reference, so investors can claim

Not sure equity is right for you?

If raising equity is not suitable for your business, you could consider other options, such as business loans. Taking on debt can be quicker than securing funding in some cases. Discover how to compare your options by reading our what is equity financing? and business loans guides.