Enterprise Investment Scheme (EIS)
What is EIS?
EIS uses tax reliefs to incentivise private investors who recognise that significant returns are achievable if they are willing to risk their funds by investing in early-stage businesses. Early-stage businesses often struggle to raise equity finance, so EIS has established itself as a trusted and crucial source of equity funding. The schemes, therefore, play an important role in facilitating the smooth flow of risk equity capital from private individuals to early-stage businesses.
The Enterprise Investment Scheme (“EIS”) is a Government scheme that provides a range of tax reliefs for investors who subscribe to qualifying shares in qualifying companies.
How the scheme works
EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.
Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale.
You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules at least 3 years after the investment is made.
Are you eligible for EIS?
both the company and investor must fulfil certain additional conditions to benefit from any of the tax reliefs under EIS. EIS is one of the more complex tax benefit options available. Before you think about applying, check that you meet the requirements, either as a company looking to attract an investor under the EIS scheme or as an investor hoping to profit from tax benefits.
If you are an investor, you must satisfy the following requirements to qualify for EIS:
- Your interest in the company must be no more than 30%
- You must not be an employee, partner or ‘paid director’ of the company
- No partner or associate of yours may have interests in the company (including your spouse, relatives, or previous business contacts)
- You must not have any form of preferential shares
- You must not have any form of controlling interest in the company
- You must not be using the scheme as a form of tax avoidance.
There is one exemption to the rule disqualifying connected persons employed in the company. This exemption aims to encourage investment from business angels in the scheme, despite their roles as directors of the company. Business angels may still qualify for tax relief despite being paid for their services, provided that the angel director was not connected to the company at the time of issue of the shares. The rules for business angels are strict, however, so its advisable to seek advice from HMRC.
For an investor to be able to claim EIS, the company they are investing in must meet the EIS eligibility requirements and maintain their EIS eligible status for the duration of the shareholding. To be considered an EIS eligible company, the following conditions must be met:
- the company must have a permanent establishment in the UK
- the company must not be listed on a recognised stock exchange, or plan to be listed, at the time of issuing shares
- the company must not have control over another company, except any qualifying subsidiaries
- no other company may have control of the qualifying company or have 50% or more of its shares
- the company does not expect to close
- the qualifying company and any of its subsidiaries must not have gross assets which exceed more than £15 million in value before any shares are issued, and not more than £16 million immediately after
- the company must have less than 250 full-time employees at the date of issue of the shares.
In addition to these conditions, the investment must be used for a qualifying trade. Most business activities are acceptable, but some of the excluded trades are listed below. Should these excluded trades represent over 20% of the business’ daily activities, this would render the company ineligible for the scheme. Examples of excluded activities are:
- Coal or steel production
- Farming or market gardening
- Legal or financial services, including banking and insurance
- Property development or leasing
- Production of fuel
- Energy generation
- Exporting electricity
- Operating hotels or care homes
- Providing services to a non-qualifying business
- Dealing in futures or securities.
HMRC will evaluate your daily business activities to determine whether your company fulfils the qualifying trade requirement. If your company deals in any of the excluded trades above, you should consider seeking advice from HMRC on your eligibility for the scheme. You can do this by seeking ‘advance assurance’.
Enterprise Investment Scheme
- In 2020 to 2021, 3,755 companies raised a total of £1,658 million of funds under the EIS scheme. Funding has decreased by 12% from 2019 to 2020 when 4,165 companies raised £1,890 million.
- As the Covid-19 pandemic impacted the UK economy, EIS investment across the first 3 quarters of 2020 to 2021 remained below the level seen across the same quarters of 2019 to 2020. However, in the last quarter of 2020 to 2021 EIS investment rebounded above the last quarter of 2019 to 2020.
- Around £358 million of investment was raised by 1,370 new EIS companies in 2020 to 2021.
- In 2020 to 2021, companies from the Information and Communication sector accounted for £571 million of investment (34% of all EIS investments).
- Companies registered in London and the Southeast accounted for the largest proportion of investment, raising £1,078 million (65% of all EIS investment) in 2020 to 2021.
If you need assistance in applying EIS, please contact us at 02082271700 or firstname.lastname@example.org.