The UK government has four venture capital schemes to help support business growth and development. You can choose from the Enterprise Investment Scheme (EIS), venture capital trusts (VCT), Seed Enterprise Investment Scheme (SEIS), or Social Investment Tax Relief (SITR). The scheme you use will largely depend on your business’ circumstances.
Seed Enterprise Investment Scheme
As its name suggests, the Seed Enterprise Invest Scheme is exclusively for businesses still in incubation stage or companies that have only been operating for two years. You must have fewer than 25 employees and less than £200,000 in gross assets. If you meet these requirements, you can raise up to £150,000 from investors.
Social Investment Tax Relief
To apply for the Social Investment Tax Relief, your business must be a charity, community interest company (CIC), or an organisation that benefits the local or wider community. You must also have less than 500 employees and £15m in gross assets. Qualifying businesses can raise up to £250,000 over a three-year period.
Venture capital trusts
With venture capital trusts or VCT investments, companies already listed on the London Stock Exchange pool money from investors to back smaller unlisted companies. To qualify, a business must undertake a “qualifying trade”, been commercially viable for less than seven years, have fewer than 250 employees, and less than £15m in gross assets.
The VCT scheme is particularly attractive for companies as they receive expert support and advice from representatives of the venture capital firm. As investing in small businesses and medium-sized enterprises (SMEs) is inherently risky, investors benefit from generous tax breaks.
Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) helps SMEs raise money by providing EIS tax relief to investors that purchase shares in your company. To take advantage of this scheme, businesses must not be listed on the London Stock Exchange, been commercially viable for less than seven years, have few than 250 staff members, and less than £15m in gross assets. If you qualify, you can raise a maximum of £12m.
EIS scheme vs venture capital trusts
Both the Enterprise Investment Scheme and venture capital trusts provide support to medium-size business (fewer than 250 employees and less than £15m in gross assets) in early stages of development. However, they serve very different purposes and as such have different benefits and disadvantages.
You might be interested in taking advantage of one or both of these schemes. The UK government caps the total amount of funding at £12m, regardless of whether you only use one or both schemes.
What are the benefits of EIS investments vs VCT investments?
One of the biggest benefits of the EIS scheme is the fact it allows business owners to maintain more control over their company. With VCT investments, the venture capital firm is heavily invested in your business’ success and as such have certain expectations about the company’s direction. A representative from the venture capital firm also acts as a middleman between you and the investors.
With EIS investments, you remain in the driver’s seat as you release and sell shares directly to investors. You can then determine how much influence investors have in the shareholders’ agreement, who invests in your company, and the number of shares sold. You also aren’t included in a portfolio like you are with many VCT investments.
Furthermore, any qualifying company can submit an application to the UK government to join the EIS scheme. Once approved, any new investor can take advantage of EIS tax relief. As any qualifying company can apply, there isn’t the same level of competition as attracting VCT investments.
What are the disadvantages of the EIS scheme vs VCT investments
In addition to funding, most VCT-backed companies also receive specialist support and advice from a venture capital firm representative. This representative normally joins the company’s board and takes an active role in your company’s growth and success. As a relatively new business owner, this assistance can be a huge advantage.
Since companies are more independent with the EIS scheme, business owners don’t get this support.
EIS tax relief vs venture capital tax relief
Both the Enterprise Investment Scheme and venture capital trusts offer generous tax breaks to make investing in small businesses more attractive. Yet, the amount you can claim and conditions for doing so vary with each scheme.
For example, you can claim tax relief on investments up to £1m for an EIS scheme, while VCT tax benefits cap at £200,000. You can also claim 30% deductions on income tax with both schemes but to qualify for this tax relief you must hold on to VCT shares for five years while you only need to hold onto EIS shares for three years.
Both the Enterprise Investment Scheme and venture capital trusts have been designed to offer investors attractive tax breaks. Specific benefits, as well as risks, will vary depending on the investors’ personal circumstances and we recommend speaking with a financial adviser if you’re considering investing.
Your call: EIS investments vs VCT investments
Your preference for the EIS scheme or venture capital trusts, as a business owner, will probably depend on how you feel about company control. If you don’t want someone telling you how to run your business, you’ll probably prefer the EIS Scheme.
On the other hand, if you recognise the value of expert advice and don’t mind having a minority ownership status, VCT investments might be a good bet. Alternatively, you could use both schemes.
Just remember, regardless of if you use only one scheme or both, you can’t raise more than £5m per year or £12m in total.
If you’re still undecided about which is best, check out our article on venture capital trusts. If you prefer the Enterprise Investment Scheme, you can learn more about the requirements and how to apply at HMRC. On the other hand, if you’ve already decided that VCTs are for you, read this article to find out how to choose the right venture capital trust.
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