Qualifying companies: EIS, SEIS & VCTs

  • Written By: Adrian Walton
  • Published: Tue, 31 Oct 2017 10:02 GMT

Currently, the aggregate annual funding limit under the venture capital schemes is £5m. This is on a rolling twelve-month period, with no reference to tax years or financial years. The venture capital schemes comprise EIS, SEIS, SITR (Social Investment Tax Relief) and investment by VCTs. In addition, there is now a £12m lifetime cap on total venture capital investment a company can receive (£20m for knowledge-intensive companies).

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Under current rules, the value of the gross assets of the company (or group if appropriate) must not exceed £15m immediately before the investment takes place
and £16m immediately thereafter.

To qualify for the scheme, the company must not be ‘in difficulty’, under the EU guidelines on State Aid for rescuing and restructuring firms in difficulty, and investments have to be made for the purpose of growing and developing the business.

Investment must be into new ordinary shares that, in general, have no preferential rights.

The company must be unquoted although it could become quoted in the relevant period (three years from the later of the share issue or commencement of trade) without loss of relief, if no prior arrangements for a quotation were in place. AIM qualifies as unquoted for this purpose.

The company issuing the eligible shares must have a ‘permanent establishment’ (essentially a fixed place of business) in the UK. The funds raised must be used in qualifying activities within 24 months of the later of the share issue and the commencement of trade.

Additional requirements include:

  • The first commercial sale of a qualifying company or the relevant trade must be less than seven years ago when receiving their EIS (or VCT) investment (ten years for ‘knowledge intensive’ companies). This rule will not apply where the investment represents more than 50% of turnover averaged over the preceding five years and the money is wholly used for entering a new product or geographic market.
  • In this respect an investment will qualify for EIS/VCT relief (if all other conditions are satisfied) if a previous SEIS/EIS/VCT investment was made in the relevant seven/ten year period.
  • There will also be a £12m cap on total venture capital investment a company can receive (£20m for knowledge intensive companies).
  • Knowledge intensive companies are broadly ones that are innovative, with significant R&D expenditure, and they must meet criteria relating to employee skills and the future commercial exploitation of intellectual property. There are various tests to be met, which are not detailed here.

Certain trades are specifically excluded, including:

  • dealing in property, shares, commodities and other financial instruments;
  • property investment and development;
  • insurance and banking (though not insurance broking);
  • leasing;
  • legal and accounting services;
  • farming, market gardening and forestry activities;
  • hotels and nursing homes;
  • exploitation of intellectual property rights (not created by the company);
  • ship building;
  • coal and steel production;
  • subsidised generation or export of electricity
  • attracting FIT subsidies: and/or
  • any energy generation.

In addition, the company must not be under the control of another company and is restricted as to how it holds shares in subsidiaries.

Seed EIS

The rules governing qualifying companies for SEIS are summarised as follows:

  • In order to qualify for the SEIS, a company must be undertaking, or planning to undertake, a new business which has fewer than 25 full-time employees and gross assets of not more than £200,000 at the time of the SEIS investment.
  • Qualifying companies will be able to raise up to £150,000 under the scheme, and the funds raised must be used within three years.
  • Companies can qualify in certain circumstances if they have subsidiaries.
  • Eligibility is determined by reference to the age of the trade, rather than the company. Any trade being carried on by the company at the date of the relevant share issue must be less than two years old at that date, whether the trade was carried on by the company or another person. For example, an individual carrying on a restaurant business established for more than two years in one location could not use SEIS to set up a company to buy that business. He or she could, however, set up an SEIS company to start a new restaurant business at another location.


A VCT cannot be a close company and must have received HMRC’s approval to operate as a VCT. Broadly similar rules to the above apply to define the types of companies in which a VCT can invest. A VCT may, however, have up to 30% of its investments in other assets such as fixed interest stocks, i.e. at least 70% by value of its investments must be represented by shares or securities in qualifying companies. Of the 70% of investments that must be in qualifying companies, at least 70% of this must be in ‘qualifying ordinary shares’; for example ordinary, non-redeemable shares (though please note recent changes to allow certain preferential rights in relation to dividends).

There is a three-year grace period for satisfying these conditions for new VCTs. The VCT’s shares must be admitted to trading on an EU regulated market. Any money held by a VCT, or held on its behalf, is treated as an investment for the purpose of these tests even if the funds are held on non-interest bearing accounts. No more than 15% of the value of a VCT’s investments can be represented by shares in any one company.

In addition, a VCT is not allowed to invest in companies that breach the aggregate annual funding limit (from SEIS, EIS and VCT sources).

You can’t use the EIS and VCTs to invest in ]all business types. Some business activities are excluded, such as property development, hotels, farming and some financial services.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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