When seeking SEIS and EIS investment, a company must state or demonstrate in their application what they intend to do with the monies raised. Essentially, the investment raised by the company must be used in a qualifying trade or as preparation to conduct a qualifying trade. The company must use the proceeds of the proposed share issue as capital for growth and development purposes. There are some exclusions regarding what SEIS and EIS investment can be used on:
- It cannot be used to acquire assets or another company; this includes a trade, intangible assets, and goodwill.
- A company cannot use the investment to repay any current or outstanding loans.
- A company cannot use the SEIS or EIS monies to pay cash out to shareholders.
- The investment cannot be used to acquire assets that can be resold by the company with little to no variance from the purchase price if the company were to fail.
- The company cannot use the investment to purchase land or finance the entirety of a land lease.
- Where 20% or less of a company’s overall trade is excluded, SEIS and EIS investment cannot be employed by this excluded trade.
- Production companies cannot use the investment to finance a film; the investment must be used to grow and develop the company’s internal infrastructure.
The reason behind many of the exclusions above are because all companies seeking SEIS and EIS investment must be risky, and there should be a considerable risk that investors will lose some, if not all, of their investment into the company.
The ethos behind these schemes is to grow and develop high-risk early-stage companies. Therefore, the investment must be used to grow and develop the company. For all SEIS and EIS advance applications, HMRC will look at three generic indicators of growth and development in a Company’s financial projections:
- Growing revenue.
- Rising costs
- Expanding the number of employees.
All SEIS and EIS investment must be spent within two years of the share issuance. If the investee company violates any qualifying conditions during the three-year minimum holding period, the investor’s tax relief will be negated. The investor will then be required to repay any income tax relief claimed and result in the loss of any other tax relief.