Enterprise Incentive Scheme(EIS)

To attract high growth companies to raise finance

If your company is a smaller 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 to grow.

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 HM Revenue and Customs.

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

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.

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.

* 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 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.

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 off-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.

 

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.
  • 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.

EIS specialist accountants

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

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.

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, especially if your business is based in London.

What Does our Service Involve?

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

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 six weeks but does provide comfort to the would-be shareholders that any investment would qualify for EIS.

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.

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.

Great firm. With been with them for over 3 years now, since the day we created the Company. Throughout they’ve been amazing.

Ed Challis, Reinfer Ltd

I approached Metric to help us set up our first business. As a start-up it’s difficult to know what to do, where to go and who to trust. Years later, we are still using Metric and class them as an integral part of our business. They are a trusted adviser and I would highly recommend their services.

Gavin Shay , Equipsme Group

Metric Accountants has been supporting the Company for the past few years. The team is very competent and understands the requirements of a tech business well. They will take all the SEIS/EIS/VAT/R&D/accounts issues off your mind so that you can focus on running your own business. They are also just lovely people to work with. I could not recommend more.

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