The Enterprise Investment Scheme (EIS) is one of four venture capital schemes and is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Certain rules must be observed both at the time of investment and for at least three years following the investment. If the rules are not complied with, tax relief will be withheld, or, in the case of tax relief having already been given, it will be withdrawn.
There are also rules in place which must be met in order for the tax relief to be awarded.
The main features of an EIS scheme are as follows:
How the scheme works
- A maximum of £12 million can be raised in the company’s lifetime, which can be built up by no more than £5 million each year. This limit includes any amounts received from other venture capital schemes.
- The company must receive investment under the EIS scheme within 7 years of its first commercial sale.
- If the company is carrying out a significant amount of research, development or innovation and is either between 7-10 years old or wants to raise more than the lifetime limit of £12m, then you can apply to HMRC to be accepted as a ‘knowledge-intensive company’ to be eligible to raise up to £10m per year and £20m in the company’s lifetime.
Money raised by the scheme
- The money raised by the new share issue must be used for a qualifying business activity, which is either; a qualifying trade, preparing to carry out a qualifying trade within 2 years of investment, research and development that is expected to lead to a qualifying trade.
- The money raised by the new share issue must be spent within 2 years of the investment, or if later, by the date you started trading.
- The money raised must not be used to buy all or part of a business.
- The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return. The net return includes income from dividends, interest payments, capital growth and upfront tax relief.
Qualifying to use the scheme
- In order to qualify to use the scheme, the company must have a permanent establishment in the UK and must not be floating on the stock exchange.
- The company must not control another company other than qualifying subsidiaries
- The company must not be controlled by another company or have more than 50% of its shares owned by another company
- The company must not expect to close after completing a project or a series of projects.
- The company and its qualifying subsidiaries must not have gross assets worth more than £15 million before any shares are issued. The value must then stay below £16 million immediately after the shares are issued.
- There must be less than 250 full-time equivalent employees at the time of the share issue.
- Any shares issued must be paid up in full, in cash when they are issued.
- Shares must not be redeemable or carry any special rights to assets.
- Limited preferential rights to dividends are allowed, although the rights can’t allow dividend to accumulate or be varied.
- When shares are issued, there must not be any arrangement to guarantee the investment or shelter the investor from risk or to sell the shares either during or at the end of the investment period.
Income Tax relief
- If an individual has invested in a company which is eligible for EIS, they will receive a 30% tax relief on the cost of the shares, in the year in which the investment was made. An individual is able to reduce their tax liability to zero through EIS relief, allowing them to claim back any tax deducted at source such as PAYE.
- There is a limit on the amount on which relief can be obtained for any year of assessment. The maximum amount that an individual can invest through EIS for 2018/19 onwards is £1m, or £2m as long as any amount over the £1m limit is invested in knowledge intensive companies.
- EIS investments can be carried back to the preceding year, providing the limit for that year is not exceeded.
- The investor must not in any way be connected to the issuing company and must have subscribed for the shares for genuine commercial reasons.
- The individual must retain the shares for a minimum of three years. If the shares are disposed of within this period, the relief will be clawed back.
Capital Gains Tax relief
- Investors who have received income tax relief on the cost of the shares, and the shares are disposed of after they have been held for the qualifying period of 3 years, will be exempt from capital gains tax on any profit made on the EIS investment.
- CGT exemption may be restricted if income tax relief is not given on the full amount of the subscription for EIS shares or the amount of income tax relief is reduced or withdrawn in full.
Share Loss relief
- If the shares are disposed of at a loss, investors can elect that the amount of the loss, less any income tax relief given, can be set against income of the year in which the shares were disposed of, or any income of the previous year, instead of being set off against any capital gains.
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. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.