Fundraising via venture capital schemes

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 three schemes: the EIS, the SEIS 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:

• Have no more than £15 million gross assets
• 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 £250,000 in fledgling companies.

To qualify, your company must have:

• Fewer than 25 full-time equivalent employees
• Gross assets of less than £350,000
• Been carrying out a new qualifying trade for less than three 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.

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 into them.

To be eligible for VCT investment your company must have:

• Fewer than 250 employees or 500 if the company is Knowledge Intensive (KI)
• 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. These limits are £10 million and £20 million, respectively, for KI companies.

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 usually prefer companies that are already in profit.

Social Investment Tax Relief Scheme (SITR)

The Social Investment Tax Relief scheme is unavailable for new investments made after 6 April 2023.

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.

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

• Income tax relief: On qualifying investments and loans to social enterprises.
• Capital gains tax relief: On gains made on investments and reinvestment of previous gains in the SEIS.

The SEIS offers income tax relief on up to 50% of an investment (though investments are capped at £200,000).

Other schemes offer tax relief of up to 30%, with a £200,000 cap for VCT and SEIS, and £1 million for EIS.

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. 

Need expert help?

A good accountant will be able to take you through the funding process and advise you at each step of the way.

Unbiased can quickly match you with a qualified accountant who can advise you on the best way to achieve your funding goals so your business can keep growing.