Enterprise Investment Scheme (EIS)
If you’re running a high-potential, high-growth SME, you’re most likely seeking equity investment in order to fuel the business and reach the next level.
The UK’s Enterprise Incentive Scheme (EIS) encourages investors to invest in your business, by offering them significant tax incentives to do so.
Due to the generosity of the tax scheme, only certain companies are eligible and, understandably, there are certain conditions that must be met, both by the company and the investor.
Because the EIS rules are complex, we’ve set out below some of the key considerations, but we would always recommend getting appropriate professional advice before proceeding. If you would like to speak to one of our specialists, please do get in touch.
EIS at a glance:
To encourage investment in early- and growth-stage UK businesses by offering tax incentives to individual investors, thereby helping those companies raise capital.
EIS tax relief explained
The Enterprise Investment Scheme (EIS) is designed to help higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Most companies are eligible to use the EIS scheme but you should double check if your trade qualify with your accountant. Moreover, a company can engage in some ineligible activities under the scheme but, these cannot constitute more than 20% of your company’s total trade.
Statistics show that high risk companies often struggle to attract outside investment because they are too high risk for traditional sources of finances, such as bank loans, and still too small for many venture capital firms, which prefer to invest larger amounts of cash in a smaller portfolio of businesses due to the time and effort involved in monitoring each investment.
The purpose of EIS is to help such companies overcome this problem and raise equity finance by incentivising equity investors by offering a variety of tax perks.
It is very similar to its “little brother”, the Seed Enterprise Investment Scheme (or “SEIS”).
There are a variety of tax perks for investors that choose to invest in qualifying companies, these are outlined further down.
A company may issue shares for a cash investment of up to £5 million in any 12 month period, with a life time limit of £12 million. It’s important to note that these limits include amounts received from other venture capital schemes.
The funds may be used for a wide range of business purposes, including research and development. HMRC simply requires that all the monies raised by the share issue must be spent on qualifying activities (growth activities) within two years of the share issue.
How to Qualify for EIS
The EIS regulations can be complex and there are many ways a company can exclude itself from qualifying for EIS investment, here are some of the more obvious ones.
- A Company cannot receive more than £5 million in total within a 12-month period under the scheme or £12 million in total in the Company’s lifetime.
- The Company cannot have been trading for more than 7 years prior to raising its first EIS-qualifying investment.
- Can’t raise more than £5 million of state aid risk finance, including EIS, in any twelve-month period, or a total of £12 million
- Must receive equity investment for ordinary shares in the company and the shares must be paid for
- Must not control another company, except for “qualifying” subsidiaries.
- The company must be unquoted at the time of issue of the shares.
- Cannot have gross assets exceeding £15 million immediately before any share issue, or £16 million immediately after the share issue.
- Must have fewer than 250 full-time employees at the time of the share issue.
- Must have a permanent establishment in the UK.
It’s worth noting that there are different eligibility criteria if your company can be defined as “knowledge intensive”.
A knowledge intensive Company under EIS
Whether a company is deemed to be “knowledge intensive” or not, the tax reliefs available to the investor are unchanged. However, if a company is knowledge intensive, it is permitted to raise a greater amount of equity investment under the EIS scheme for a longer period of time.
A company doesn’t need to consider whether it’s a knowledge intensive company unless or until it ceases to meet the standard EIS requirements (e.g. if its been trading more than 7 years, for example).
If you do need to consider whether your company satisfies EIS’s knowledge intensive rules, the key considerations are that the company must:
- have less than 500 employees at the time shares are issued
- undertakes work that will create intellectual property and foresees that this intellectual property will generate the majority of the company’s business over the next ten years
- spend a certain proportion on their costs on research and development or innovation.
If your company qualifies as a knowledge-intensive company you can use the enhanced EIS scheme. This allows a qualifying company:
- to raise more money – up to £20 million in aggregate.
- to qualify for EIS up to 10 years after starting to trade (rather than the standard 7 years).
- to raise more equity investment from each investor, through higher investor limits.
What are the perks with the EIS scheme for investors?
The benefits for the investor of investing via the EIS scheme are equally clear. The EIS offers attractive tax reliefs to potential investors. The principal types of tax relief are listed below.
Income Tax Relief
An investor receives a 30% income tax relief of the cost of the shares, up to a maximum of £1 millon each tax year (may be £2 million if £1 million of them is in a knowledge intensive company. The relief is deducted from the investor’s tax liability. You can claim the tax relief in the year when the shares are issued, or you can also choose to treat some or all as issues in the previous year.
Loss Relief
If the shares are disposed of at a loss, the investor can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.
Tax Free Disposal
If you have held the shares for the minimum of three years and sell the EIS investment your profit of the shares is 100% tax free.
EIS specialist accountants
Metric has supported businesses over the last 15 years with their EIS application and gained an extensive experience in the complexity of the EIS rules. We can help you review your business and ensure that you are set up for a successful application.
Our strongest recommendation is that you seek help from a professional EIS specialist as early in your investment process as possible. That way we can at an early stage identify any issues that you may have. If you fail on a technicality, your investors will not be impressed, and the worst case scenario may be that HMRC realised that you aren’t eligible at the time of the sale of the shares.
Advance assurance
We’d always recommend that the initial step is to seek advance assurance.
Whilst not required, it’s sensible for any company that intends to issue EIS-compliant shares to obtain advance assurance from HMRC. This process can take circa six weeks but does provide comfort to the would-be shareholders that any investment would qualify for EIS.
In order to understand your business, we would set up a kick off meeting to discuss your Company and your particular circumstances and identify any potential issues. Thereafter we will provide you with a list of items that we will need you to provide us in order for us to complete your advance assurance application form. We will also prepare a letter accompanying the application form that sets out any information that HMRC may need to provide the Company with an advance assurance.
Obtaining the funds and share issue
Ahead of receiving the investment the company director must first ensure that they are legally able to issue new shares as per their Articles of Association.
It may be that they first need to pass a resolution and may need to hold a board meeting to seek approval for the proposed share issuance.
When the Company has received the funds to their bank account the shares can be issued and recorded at the Registrar (Companies House) on the SH01 form(s).
Metric can support with both the SH01 and to provide investors with their share certificates. There are some commonly mistakes when receiving funds that can be avoided and that would reduce accountancy fees. For example, always try to obtain all the investment funds over a few couple of days to avoid having shares allotted on many different dates.
Apply for EIS
After the company has been trading for 4 months the company, we will submit an EIS1 (or compliance statement) to HMRC to request the EIS certificates that the investors need to have to claim their tax relief.
You need to complete one for each share issue. When these have been received, they will be provided to your investors, and they need to keep this documentation in order to claim their tax relief in their personal tax return. We always recommend the Company to keep a copy of the EIS certificate in case there are some questions or due diligence at a later stage, as if the individual lose the EIS certificate it can be hard to replace them without a copy.
If the business hasn’t obtained an advance assurance HMRC will require more documentation and information at the time of the EIS1 submission in order to decide the eligibility of the investment.
