What is the Enterprise Investment Scheme?
The Enterprise Investment Scheme (EIS) is a tax relief scheme designed by the UK government to encourage private investors to invest in potentially high risk start-up companies and early-stage businesses, at a time where it is often difficult to raise funds. Tax relief may be available to individual investors when they buy shares in the company, including a 30% relief of the value of their investment on income tax in the year invested. In certain circumstances capital gains tax rollover relief may also be available, reducing the cash cost of the investment by the CGT liability on the gain held over. In addition to EIS, there is also the Seed Enterprise Investment Scheme (SEIS) which focuses primarily on start-up companies, however SEIS will be covered separately in an upcoming article.
For companies, EIS is therefore an attractive method of gaining investors as it increases the opportunities for growing companies to raise extra funds, and as an individual, it is an effective way to reduce tax liabilities. There are, however, strict rules that a company must follow in order to qualify for EIS which we will cover below.
Advantages of EIS
EIS is a key driver for growing companies as it provides an incentive for private investors to take risks by investing in the company. The advantages will differ slightly for Knowledge Intensive Companies (KICs) compared to ‘non-KICs’. A KIC is a company where research, development or innovation is being carried out at the time they are issuing shares. KICs may be considered more advantageous as there is more flexibility around the rules.
A non-KIC can raise up to £12m overall in its lifetime (£20m for KICs) under various tax relief schemes collectively which includes EIS, SEIS, Venture Capital Trusts and Social Investment Tax Relief. However, a company may not raise more than £5m in a 12 month period (£10m for KICs).
In addition, another advantage to note is that the funds raised through EIS can be used to repay third-party loans, provided that the loan is not connected to the investor and the borrowed money was used for purposes of the trade.
Will my company qualify for EIS?
There is a wide range of EIS qualifying companies spread across a variety of sectors and industries, however there are prohibited trades that will not qualify, including financial trades, farming and hotel/property development. Most companies in other industries are likely to qualify provided the company is within a specific criterion. To qualify for EIS, all of the below must apply:
- The company must be an unquoted trading company with a permanent establishment in the UK
- The company must intend to use the money for growth and long term development of the trade
- Assets must be less than £15m before the share issue, and no more than £16m after the share issue
- Number of full-time equivalent employees must be less than 250 (500 for KICs)
- Generally, the share issue must take place within 7 years of the first commercial sale and 10 years for KICs (however there is some leeway to this rule explained below)
- The cash raised must be used within 2 years of receiving it
- The cash raised must present a risk of loss of capital to the investor
Although the fundraise must be taken within 7 years of the first commercial sale, not all of the funds have to be raised within 7 years. As long as the initial investment of EIS shares is made within this time, the company may continue to raise funds until it reaches the lifetime limit of £12m. In addition, if the company has reached its time limit, it still may be possible to raise funds through EIS if a new business activity is introduced that counts as a ‘start-up’ according to HMRC guidelines.
How to apply for EIS
If you believe that your company is EIS compliant, there are two options you could choose from to proceed.
The first option is to apply for Advance Assurance, which is an application submitted to HMRC, who will then respond confirming whether your company will qualify for EIS or not. This can be done before or after issuing shares, however it is a good idea to obtain Advance Assurance as soon as possible to provide an incentive for investors. If you are not 100% certain that your company qualifies, it is highly recommended you apply for Advance Assurance to avoid wasting any unnecessary time or resources, whilst also providing some comfort that the investment will qualify for tax reliefs.
Once you have obtained Advance Assurance, the next step would be to complete a Compliance Statement (EIS1), which is an application providing details of the investors sent to HMRC, who will confirm whether or not the issued shares will qualify for EIS.
Alternatively, if you are confident that the company qualifies for EIS, you can skip the first step and complete a Compliance Statement (EIS1) in the first instance. You will have to provide additional information, including a business plan and financial forecasts, a copy of the latest account and details of trading activities (a full list can be found on the HMRC website).
Once the Compliance Statement has been approved by HMRC, the company will receive a letter and Compliance Certificates (EIS3s) for each of the investors. The letter will include a unique investment reference number which will need to be input into the certificates, as well as some other information regarding the investment, for the investors. Once the investors have received their certificate, they can use the unique investment number to claim tax relief.
Due to the simple process of qualifying for the Enterprise Investment Scheme, there should be even more incentive for all start-ups to consider using the scheme to grow their businesses. The Enterprise Investment Scheme is a great opportunity to raise funds quickly and cost-effectively, whilst keeping the satisfaction of investors as a main priority.
Should you have any queries or questions in respect of the above, please reach out to your usual Arnold Hill & Co contact, call our mainline on 0207 306 9100 or email our general address – firstname.lastname@example.org
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.