The Enterprise Investment Scheme (or EIS) is a tax incentive that helps companies to raise capital by offering tax relief to individual investors who buy new shares the company. The benefit of EIS to companies is that their shares are more attractive to investors because of the tax relief.
Under EIS, the company can raise up to £5 million per year, up to a total of £12 million (across all venture capital schemes, not just EIS) over the company’s lifetime. And the first investment under a venture capital scheme claim must be within 7 years of its first commercial sale.
There are different rules for knowledge-intensive companies that carry out a significant amount of research and development or innovation. (These rules are not covered in this post)
The company needs to follow the EIS rules for 3 years following investment for the investors to retain their tax relief. If the company does not follow the rules, the tax relief is withdrawn from the investors.
EIS Conditions for the Company.
- The company cannot raise more than £12 million from a combination of EIS, VCT (Venture Capital Trusts), SEIS (Seed enterprise investment scheme), SITR (social investment tax relief)
- EIS investment must be within 7 years of the company’s first commercial sale unless the company can show that it wants to raise money for a different activity or a new geographical market and the company is seeking at least 50% of the company’s average annual turnover for the last 5 years.
- The company must not have more than £15million of gross assets and less than 250 full-time equivalent employees.
- The company must carry out a qualifying trade.
- The company must use the money for growth and development – to grow things like revenue, customers, employees.
- The shares must be newly issued and paid for in cash.
- The company has to have a way to accept payment before shares are issued.
“Risk to capital” condition.
The investment must meet the critical “risk to capital” condition – that there is a genuine risk that the investor will lose more capital than they are likely to gain as a net return (the net return includes dividends, interest, fees, capital growth and tax relief). HMRC will decline applications where it does not believe that there is a genuine risk to capital.
When looking at the “risk to capital”, HMRC will look at things like the company’s sources of income, assets, structure, use of subcontractors, marketing of the investment opportunity, relationship with other companies.
The shares must be full-risk ordinary shares, they must not be redeemable and they cannot carry special rights to a company’s assets if it closes down. Investors cannot have priority or protection over other investors.For #startups looking to #fundraise consider #EIS for tax-efficient #investment Click To Tweet
Applying for EIS
An EIS1 application must be made either within 2 years of carrying out a qualifying business activity for 4 months or 2 years of the end of the tax year in which the shares were issued.
It is possible to apply for advance assurance, in advance of the investment being made but an EIS1 application must still be made after the shares have been issued.
Advance assurance might be a condition set by a company’s prospective investors. Allow at least 30 days (but preferably more) for advance assurance. Often it can be given in a quicker time-frame but there are peak times of the year where it can take longer.
If the EIS1 application is successful, HMRC will issue a form EIS2 which will contain a Unique Investment Reference (UIR) number for the particular share issue, to the company. The EIS2 authorises the company to issue the EIS3 forms to individual investors. (The company must not issue EIS3 forms without having received this authorisation.) The company must complete all the relevant information in the EIS3 form and then issue them to each investor (each EIS3 form is personal to each investor.)
The investors use the EIS3 to claim their tax relief as part of their personal self-assessment tax return – assuming that the investors themselves are eligible. Possession of an EIS3 certificate doesn’t automatically mean that an investor is eligible for tax relief. It isn’t the company’s responsibility to apply for the individual investor’s tax relief.