The Benefits of Enterprise Investment Scheme (EIS)
EIS is designed to make investing in startup business more attractive to investors by mitigating some of the financial risks. EIS has a number of rules in place that the company must adhere to before they can quality for the EIS. This is based on the kind of company it is, the amount of money it wishes to raise and what the money will be used for.
What type of company qualifies for EIS?
- It must be an unquoted company but quotation on alternative markets is allowed as these aren’t recognised by the EIS
- It must have fewer than 250 full time employees and must not be controlled by another company.
- It must be a small company where gross assets do not exceed £15 million immediately before the share issue and £16 million immediately after.
- It can either be a company carrying on the qualifying trade or the parent company of a trading group.
Limitation on the money raised
For shares issues on or after 6 April 2012, the annual investment limit is £5m. ‘Relevant investments’ now include:
- An investment of any kind made by a VCT
- An issue of shares in respect of which the company provides an EIS compliance statement (EIS1)
- An issue of shares in respect of which the company provides an SEIS compliance statement (SEIS1)
- Any other investment which is a State aid approved by the European Commission in accordance with the Community Guidelines on Risk Capital Investments in Small and Medium-sized Enterprises (as replaced or amended)
How and when the money raised must be used
The money can be used for existing qualifying trade or for the purpose of preparing to carry on such a trade. Since April 2011, it does not have to be wholly or mainly within the UK.
The money raised must be spent within two years or used for research and development.
Limitations on trading activities
Excluded activities include: dealing in land, commodities and financial instruments, financial activities such as banking, property development, legal and accountancy services, coal or steel production and farming or market gardening.
A company can provide some of these excluded activities, but they must be 20% or less of company’s activities. They must have a permanent establishment in the UK since 6 April 2011.
If they raise money through EIS and do not meet requirements the business should inform the Small Companies Enterprise Centre within 60 days.
How do I apply for EIS?
The EIS is administered by HM Revenue and Customs (HMRC) by the Small Company Enterprise Centre (SCEC). The SCEC decides if the company is eligible and checks accounts to ensure that they meet the requirements.
The company has to have been trading for at least four months and the form has to be submitted within two years after the end of the year of assessment in which shares were issued.
The SCEC operates the ‘advance assurance’ scheme, whereupon companies can submit their plans for funding alongside details of their business. The SCEC will subsequently advise whether the company is likely to qualify for EIS. The advanced assurance scheme form is a separate form to the EIS application but it is a beneficial exercise, especially for those using the EIS for the first time.
Once the shares are issued, then the company has to complete the EIS1 form. For each share issue, a new EIS1 form must be submitted.
Once happy that the company qualifies, the SCEC will issue an EIS2 form and then will issue EIS3 forms that are sent out to the investors so that they can claim tax relief.
This process has to be undertaken each time a company issues shares which it wishes to attract EIS relief.
The availability of any tax relief, including EIS and SEIS, depends on the individual circumstances of each investor and of the company concerned, and may be subject to change in the future. If you are in any doubt about the availability of any tax reliefs, or the tax treatment of your investment, you should obtain independent tax advice before proceeding with your investment.
Please visit the HMRC website for further information on EIS tax relief.