When you’re building your startup, securing investment is critical.
Schemes such as the Seed Enterprise Investment Scheme (SEIS), or the Enterprise Investment Scheme (EIS) offer powerful tax incentives for investors and founders, and it’s likely you’ll want to leverage these tax benefits to encourage investment into your company.
However, there are a number of exclusions written into the eligibility criteria—one being businesses involved in financial services, as defined by HMRC.
At first glance, this may seem like bad news for all fintech startups, but does it mean you’re automatically ineligible? Not necessarily.
To be eligible for S/EIS, there has to be sufficient risk-to-capital. These schemes were designed to incentivise investment into high-risk businesses, to offset this risk posed to investors.
The UK government holds the view that businesses operating within the financial services industry are lower risk, and are already operating within established markets.
For example, any company regulated by the Financial Conduct Authority (FCA) should not have the capacity to put funds at risk, and so this key eligibility criteria would not be met.
The definitions of eligibility are subject to change on the grounds of each applicant and their specific business activities, however as a general rule, there are certain activities that HMRC deem to fall within the exclusionary criteria:
The key reason that these industries are generally excluded from S/EIS and EIS is that they are involved in the moving and borrowing of money, rather than developing innovative technology or products.
This question is quite a grey area, and will depend greatly on your specific business activities, and their individual assessment by HMRC when applying for advance assurance.
It's important to note that exclusion only applies if a significant portion of your business—generally considered to be over 20%—falls within the restricted criteria. If your startup operates across multiple activities, with financial services being just one part, you may still qualify for S/EIS.
If your product focuses more on technology, rather than on directly offering financial products, you may also qualify. Here are some examples:
A company that offers a platform that connects individual borrowers and lenders without acting as a bank. This is because the company is a tech-driven marketplace that can facilitate the lending process without participating in the financial process itself.
A company that uses AI to power an advisory platform that helps users to allocate savings or understand investment strategies. This company would be developing technology to provide financial insights rather than manage investments directly.
A platform that leverages AI and other data sources to analyse and inform creditworthiness. This company would not be issuing credit themselves, and so could argue that they are a tech-driven company providing solutions within a financial space.
These companies would be providing assistance or solutions to compliance processes for financial firms, using technology and AI for their processes. This would be in cases of financial compliance, such as Know Your Customer (KYC) or Anti-Money Laundering (AML).
They would be excluded as they are offering a tech-based solution to be used by financial institutions, rather than operating directly within financial services themselves.
If you’re operating in fintech, and want to assess your eligibility for S/EIS, you should consider some of the following criteria and approaches to your business model and application.
All of the above should only be done if it is applicable to your business. If you inaccurately represent your business activity for the sake of securing S/EIS, your relief could be lost down the line.
Whilst navigating S/EIS as a fintech startup can be tricky—it’s not impossible. If your business is built around innovation and providing technological solutions within a financial sphere, you have a good shot at qualifying.
Ensuring your business model is transparent about your business activities, and structured in a way that keeps in mind HMRC’s eligibility criteria from the get-go will give you the best possible chance of approval.
You don’t need to navigate your investment journey alone. InVestd Raise simplifies fundraising, giving you the tools to prepare and execute a funding round without the hassle.
From integrated S/EIS applications and pitch deck templates to secure data rooms and easy digital cap table management, InVestd Raise streamlines every step, so you can secure the investment you need to grow.
What are you waiting for? Book a call today.