Raising SEIS / EIS funding for a software company? Watch out!
Imagine you are setting up a software development company. Perhaps you plan on generating revenues using a Software as a Service (‘SaaS’) business model: charging users a licence fee to access the service via the cloud.
You need funding and are considering the benefits of Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) to help attract funding for your tech startup. It is always good practice to seek advance approval from HM Revenue & Customs that your company is a qualifying company for the purposes of raising money under either or both of these UK Government tax incentives.
One of the key points to consider as part of this advance planning process is whether your company will be carrying out a qualifying trade for the purposes of these tax reliefs? This is not always so obvious – software companies being a case in point.
Note that the trade of ‘receiving licence or royalty fee’ income is of itself an excluded activity i.e. does not qualify, under either scheme. However, there is an exemption from this restriction where the company creates the whole, or greater part, of the underlying intellectual property that goes on to generate the licence or royalty income. Cue – breathe a huge sigh of relief!
Matters are not so straightforward, however, in situations where intellectual property is acquired from another company and that transferor company has already monetised the IP and received licence fee income in relation to it. At what stage will you have created the whole (doubtful) or greater part of the underlying IP and so qualify for SEIS / EIS?
* I should clarify that the above considerations are not exclusive to software companies – it is simply the most common scenario that I have encountered in practice.