Dragons’ Den and EIS and SEIS
The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs designed to encourage investments in small companies. EIS offers both income tax and capital gain tax reliefs to investors in these companies. There are many provisions that both the company and investor must adhere to, such as that the investor must not have more than a 30% interest in the company.
SEIS stands for the Seed Enterprise Investment Scheme, and is a similar campaign designed to encourage investors to finance startups by providing tax breaks.
As an illustration of how EIS works, we can give you an example of it working in practice with the help of BBC television programme Dragons’ Den. The scenario that we will discuss is a common occurrence, and understanding EIS and SEIS will help you understand why.
In series 11, episode 2 of the show, Donna, the founder of Running Mat Ltd entered the Den asking for a £50,000 investment in return for a 25% share in her business. After staking her claim and being berated by the male Dragons, Donna received an offer from Deborah Meaden of £50,000 for 40% of the business.
We will assume that Running Mat Ltd has either EIS or SEIS status. If Meaden’s offer is accepted, she has invested £50,000 for a 40% share in the business. As this is 30% or above, Meaden would not be entitled to EIS and any potential tax relief would potentially be limited to capital losses. If the business was a success, Meaden would have to pay capital gains if she later sold her shares for a profit.
In the show, fellow Dragon Kelly Hoppen also matches Meaden’s offer and in turn the Dragons each invest £25,000 for a 20% share each.
This changes the situation, as the cost of the investment now falls into the criteria to qualify for EIS and the available tax reliefs. The below calculations are based on the potential available reliefs:
EIS
There is less than 30% interest in the business from each Dragon, meaning £7,500 tax relief would be given, leaving £12,500 at risk if the investment becomes worthless. An additional relief is given at 45% of £5,625, leaving the total relief at £13,125 and meaning that total investment risk stands at £6,875, or 65%.
SEIS
There is a 50% interest in the business, meaning £10,000 tax relief is immediately given. Assuming the funds invested were from other capital gains, then 50% is available for relief, meaning £10,000 at 28% is £2,800. If the investment becomes worthless, the capital at risk is £10,000 at 45%, meaning £4,500 further relief and the total relief being £17,200 or 86.5% of the investment. Each investor is therefore only risking £2,700.
Using the above SEIS and applying that to Theo Paphitis’ investment in Series 10 episode 11 when he invested £50,000 for 30% of P4CK in 2012/13, the risk reward seems even better. Back in that year, the SEIS relief allowed 100% capital tax relief. This in effect, meant that if Paphitis satisfied certain criteria, then the actual tax relief of £50,250 is more than he invested.
We don’t know for sure that he would have met all the criteria, but if he did, it somewhat goes against the line of “why should I give you £50,000 of my kids inheritance!”