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EIS

Enterprise Incentive Scheme (EIS)

A tax break to help high risk companies

If your company is a high risk private limited company and you’re seeking investment for your young business, it can be hard to persuade investors to provide the investment that you need.

As a young Company, you may have very little, or none, trading history and would be regarded as a high-risk investment for potential investors.

To make it easier for these kinds of Companies to raise investment, a tax scheme called the Enterprise Investment Scheme (EIS) was designed.

By creating tax breaks for equity investors, HMRC made it more attractive for investors to invest in the kind of businesses.

cogs and wheels

What is the enterprise incentive scheme (EIS)?

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.

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”), but with several subtle but important differences.

There are a variety of tax perks for investors that choose to invest in qualifying companies. Read on to find out whether your company qualifies to receive equity investment under the EIS.

entrepreneur

What is the difference between SEIS and the EIS Scheme?

  • Company age
  • Total investment in a company
  • Total investment for an investor per year
  • Income tax relief for the investor
  • SEIS

  • Less than 2 years *
  • £150,000
  • £100,000
  • 50%
  • EIS

  • Up to 7 years old **
  • £12 million with max of £5 million/year ***
  • £1 million
  • 30%

* The company cannot have been trading or being preparing for trading for more than two years.

** If you have raised money in the first 7 years you can continue to use the scheme even for older companies.

*** The amount can differ if you are knowledge-intensive company.

What our clients say

Michal Szlas, CEO

Michal Szlas, CEO

“Metric have worked with me to help me grow the company to where we are now. They are professional and available to help whenever required. They are also very knowledgeable about the market and have helped me with raising money as well as other corporate matters. As a result, they helped take the Company from turning over £25k a month, to almost a million per month. Helping me raise money which has definitely aided the business growth and which has been greatly appreciated”

otty logo
Read how we helped a fast growing e-commerce business expand operations (click to open)

The founder of Otty, Michal Szlas, met Metric when the Group was funding its operations organically. Michal knew however that in order to avoid losing market share to its competitors it needed to undertake a funding round to have the ability to finance further growth.

With help from Metric, Michal considered the various funding options available before pressing ahead with a small “seed” round of investment and then, in due course, a larger “Series A” raise.

This has allowed Michal to expand operations, entering the B2B market and overseas markets.

Michal recognises the importance of having a professional advisor that understand high-growth companies:

“Metric have worked with me to help me grow the company to where we are now. They are professional and available to help whenever required. They are also very knowledgeable about the market and have helped me with raising money as well as other corporate matters. As a result, they helped take the Company from turning over £25k a month, to almost a million per month. Helping me raise money which has definitely aided the business growth and which has been greatly appreciated.”

Looking ahead, the Group is entering a new phase of growth, to reflect the demands of a larger management team and shareholder base. This places greater importance on the need for accurate gross profit margin analysis and forecasting, which Metric are helping to develop.

We asked Michal what his advice for other companies would be that are growing rapidly, with all the benefits and potential pitfalls that this brings. Michal said:

“Build strong relationships with the people and companies you think are going to see you through the growth and take your time to perfect the product.”

Wise words indeed.

What are the benefits you can expect with the EIS Scheme?

A company may issue shares for a cash investment of up to £5 million in any 12 month period, which it may use 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.

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.

a box of ideas
Income Tax relief

Investors may recover 30% of the cost of the shares, up to a maximum of £1,000,000 each tax year.

The relief is deducted from the investor’s tax liability, providing there is sufficient tax liability against which to set it.

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.

Combined with income tax relief, that means that the investor has downside loss protection of 65p for every £1 invested.

Capital Gains Tax deferral relief

The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company in certain circumstances.

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 £5,000,000 in total within a 12 month period under the scheme.
  • Must receive equity investment for ordinary shares in the company.
  • 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.

4 reasons you need our expertise

Here’s why your company needs an expert, rather than a “high street” accountant if it is planning to raise equity finance via EIS:

 

The tax rules are complicated

In order for an investor to qualify for EIS and enjoy the significant tax advantages, both the company and the investor must meet various criteria. If you fail on a technicality, your investors will not be impressed.

Understand the deal

Whenever a business raises finance it is entering into a long-term commitment. But what exactly have both parties committed to undertake and for how long? These are questions that need to be fully answered by a professional who understands your business and its needs.

It’s not just about the cash

Are you hoping that the investor will also bring their strategic knowledge and business acumen as well as their cash? Does your investor want to be consulted (or vote) on management’s decisions? These are points that we regularly advise on and need to be thought through carefully by management in order to avoid problems later down the line.

Is equity finance the right option?

Whilst raising funds by issuing shares has many benefits compared to alternative sources of finance, it may not be best for your business. This will very much depend on your ambitions and requirements. A specialist will be able to talk you through the options and help identify what’s right for your business.

What does it involve?

We provide a complete EIS service, which includes completion of all of the steps set out below.

1
Advance assurance

We always recommend that you first seek an advance assurance. Whilst not required, it’s sensible for any company to have an EIS- advance assurance in advance of receiving an investment. This process can take up to circa two months but does provide comfort to the would-be shareholders that any investment would qualify for EIS.

2
Share issue approval

Before issuing new shares and finalising a round of investment it is important to ensure that the Company is legally able to issue shares in the Company. If a company wishes to legally issue new shares, the directors must ensure that the Articles of Association allow the directors to issue new shares without the need to first pass a resolution. Sometimes a board meeting is required to seek approval for the proposed investment.

3
Issue shares

Once the directors have the necessary authority, the cash investment can be received to the Company and the shares can be issued. Share certificates can thereafter be sent to the new shareholders and the Companies House updated with the new shares, via SH01s. 

4
Apply for EIS

After the company has been trading for 4 months or spent 70% of the “EIS funds”, the company can submit an EIS1 (or compliance statement) to HMRC to request the EIS certificates that the investors need to have to claim their tax relief.

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For many, the tech startup scene is about lifestyle choice and purpose. We feel the same way.

Involved in the disruptive community

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Our strong professional network

Because we are specialists, we have developed strong relationships with a range of key players in our sector.

Ready to get in touch?

Katrine and James, Metric

Unlike many accountancy firms, we have the specialist knowledge and experience to provide the tailored advice that your company needs.

We’re confident that our experience of helping Award Winning companies will ensure that you eliminate much of the pain – and costs – associated with operating your technology or high growth company.

In order to find out more and to book your free 45 minute consultation, contact us on 0203 542 4990 or get in touch via our contact us page.