Fundraising via venture capital schemes

Updated 15 November 2019

A venture capital scheme is a government scheme that helps small or medium-sized companies find investment. When investors hold shares or bonds in the business through one of these schemes, they benefit from generous savings on both income tax and capital gains tax.

Venture capital schemes are a good way to raise funds for business growth, such as:

• Buying new business equipment
• Raising working capital or improving cash flow
• Research and development (R&D)
• Hiring new staff

Each scheme has slightly different rules, but the main requirement is that funds raised must go towards the improvement of your business in some way. Other rules state that you must not make agreements with your investor that protect them from investment risk or enable tax avoidance (other than in the way intended by the scheme).

Is my company eligible for a venture capital scheme?

You can raise funds through a venture capital scheme if your company is permanently based in the UK, isn’t on any recognised stock exchange and has gross assets of less than £15 million. Some sectors are also excluded, such as legal and financial services, property development, and coal or steel production. If you’re unsure, you can seek ‘advance assurance’ from HMRC or speak to a financial adviser before applying.

How much can we raise through venture capital?

The maximum you can raise from all the venture capital schemes you use is £5 million in any 12-month period and £12 million during the lifetime of your business. However there may be higher limits if your company carries out R&D and innovation activities.

Currently there are four types of scheme: EIS, the SEIS, the SITR and VCTs.

Enterprise Investment Scheme (EIS)

The EIS is a way to raise up to £5 million from individuals buying new shares in your company. To qualify for EIS, the main criteria is that your business must:

• Employ fewer than 250 full-time equivalent staff
• Have no more than 50 per cent of its shares owned by another company
• Apply within seven years of your company’s first commercial sale (the first time you traded your services or products for money)

You must spend the money within two years of the investment, or the date you started trading, whichever is latest. You’re not allowed to use EIS investments to buy any size of stake in a new business.

Also, before you issue any shares, the investor(s) must have paid for them fully in cash.

Seed Enterprise Investment Scheme (SEIS)

Designed for new small companies, the SEIS allows individuals to invest up to £150,000 in fledgling companies.

To qualify, your company must have:

• Fewer than 25 full-time equivalent employees
• Gross assets of less than £200,000
• Been trading for less than two years

You won’t be able to use SEIS if you’ve already raised funds through the EIS or from a Venture Capital Trust (VCT). You must spend the money raised within three years of issuing shares to your investor(s), and (just like the EIS) shares must be paid for upfront in cash.

Social Investment Tax Relief Scheme (SITR)

If you’re running a social enterprise (such as a charity, not-for-profit or community interest company), the Social Investment Tax Relief Scheme (SITR) could allow you to raise up to €344,827 (around £250,000) from direct individual investors for investment back into the community.

Among other terms, your organisation must have:

• Fewer than 500 full-time equivalent employees
• A clearly defined, regulated social purpose
• Gross assets of £15 million or less

Again, you can’t use the funds to buy shares in other companies, and they must be used within 28 months of your investor buying shares or lending you the money as a debt investment.

Venture Capital Trusts (VCTs)

A VCT is different from the other kinds of venture capital scheme. It is a fund held by lots of investors, which makes indirect reinvestment into smaller companies.

VCTs are companies authorised by HMRC and listed on the London stock market so investors can buy in to them. To be eligible for VCT investment your company must have:

• Fewer than 250 employees
• Gross assets of £15 million or less

Again, you can’t raise more than £5 million in any 12-month period or more than £12 million during your company’s lifetime.

The other main difference with VCTs is that you don’t apply through HMRC, but instead approach the company yourself. They don’t tend to invest in startups or micro-companies, and naturally prefer companies that are already in profit.

Why do investors choose venture capital schemes?

Venture capital schemes are a great incentive for investors to put money into your business. Firstly, they are a way for people to invest in companies and social enterprises that are not listed on a stock exchange.

Secondly, investing in a venture capital scheme offers significant tax savings. This makes it more attractive for investors to fund smaller, potentially fast-growing companies, by mitigating some of the risk of doing so.

 Tax reliefs that may be available (depending on the scheme) include:

• Income tax relief on
  • qualifying investments
  • loans to social enterprises
• Capital gains tax  relief on
  • gains made on investments
  • reinvestment of previous gains

The SEIS offers income tax relief on up to 50 per cent of an investment (though investments are capped at £100,000). Other schemes offer tax relief on up to 30 per cent, though the caps are higher.

Find out more about tax reliefs for investors on venture capital schemes.

How do I apply for funding through a venture capital scheme?

First, explore which scheme(s) are most suitable for your company, and check your eligibility. Then apply through HMRC (or directly in the case of VCTs). Remember you will need a strong new business pitch to demonstrate how your company will use the funding to achieve growth. A good accountant will be able to take you through the funding process and advise you at each step of the way.