What is the Enterprise Investment Scheme & how does it work?
The Enterprise Investment Scheme (EIS) is a UK government initiative that encourages investment in small, high-risk companies by offering tax incentives to investors.
This is part two in our mini series on the difference between SEIS and SEIS - part one covered What is the Seed Enterprise Investment Scheme (SEIS)? → This time we look at EIS, which is designed for more established small businesses.
In this blog post, we consider the key criteria for the company and investor to qualify for the EIS, and the potential benefits of the scheme.
Please note all rates and allowances are correct at time of writing.
What is the Enterprise Investment Scheme (EIS) in a nutshell?
The EIS scheme serves as a valuable tool for promoting investment in small businesses by offering attractive tax incentives to investors. The scheme not only provides financial benefits, such as income tax relief and capital gains tax exemptions but also supports the growth of early-stage companies. However, potential investors should carefully assess the associated risks and stay informed about regulatory changes, underlining the importance of due diligence and professional advice in navigating the opportunities and challenges presented by the EIS.
How do you qualify for the Enterprise Investment Scheme (EIS)?
Please see below a summary of the requirements and benefits for a company that qualifies for EIS relief.
What companies are eligible for investment under the Enterprise Investment Scheme (EIS)?
In order to be eligible for the EIS, the company or group of companies must be less than seven years old when it receives its first investment.
The company must be carrying out a qualifying trade from the UK. Some examples of non-qualifying trades include:
Legal and financial services
Property development
Banking, insurance, debt or financing services
Dealing in land, in commodities or futures or in shares, securities or other financial instruments
Explore the full list of criteria for qualifying for the EIS →
What are some of the key eligibility areas for the Enterprise Investment Scheme (EIS)?
Risk-to-Capital: The company must have long-term growth objectives, with a significant risk of potential investor loss.
Unquoted Status: The company must be unquoted at the time of share issuance, with the flexibility to subsequently become quoted without loss of EIS relief.
UK Permanent Establishment: The company must have a permanent establishment in the UK
Financial Health: The company must not be in financial difficulty
Control and Independence: The company must not be under the control of another company, and there should be no arrangements for future control at the time of share issuance
Qualifying Subsidiaries: The company must have qualifying subsidiaries, with specific ownership criteria
Permitted Maximum Age: The company must be less than seven years old at the time of its first relevant investment (or 10 years for knowledge-intensive companies)
Gross Assets Test: The company must meet the ‘gross assets’ test, with a maximum limit before and after EIS share issuance
Number of Employees: The company must have fewer 250 for any company and 500 full-time employees for knowledge intensive companies at the time of share issuance
Qualifying Business Activity: The company must either carry on a qualifying trade or be the parent of a trading group, meeting specific criteria for qualifying activities
What are the limits for investment under the Enterprise Investment Scheme (EIS)?
Companies can raise up to £12m from a combination of EIS and SEIS and other forms of state aid over its lifetime, but not more than £5m in any one 12 month period.
What type of shares can you issue within the Enterprise Investment Scheme (EIS)?
Shares must be paid up in full, in cash, on issue. They can’t carry any preferential rights and must not be redeemable.
What is the risk to capital condition of the EIS in further detail?
In order to be eligible for the scheme, the company needs to show that the investment meets the risk to capital condition. This means that:
The company must use the money for growth and development, this includes growing revenue, staff and customer numbers and the company has objectives to grow its trade in the long term (around 3 years)
The investment should be a risk to the investor’s capital
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
Capital growth
Upfront tax relief
The investment will not meet the risk to capital condition if there are any risk reducing arrangement in place that can result in an investor:
Getting priority over other investors
Being able to withdraw their money as soon as possible
Protecting their money so that other investors money is used first.
What is the process to become a qualifying EIS company?
Ahead of the formal application, a company can apply for advance assurance from HMRC that the company qualifies. This can be used to show potential investors that an investment may qualify for a scheme. The application must be made for specific share issues and the advance assurance only applies to that particular issue.
There are three steps to the formal process:
Step 1: Completion of the form EIS1 →
Step 2: HMRC will review the application and if successful will issue a EIS2 form which will include a unique investment reference (UIR)
Step 3: The company can then issue EIS3 compliance certificate to each investor
How can we help you with the Enterprise Investment Scheme (EIS)?
Advance assurance can be sought from HMRC to confirm you meet the qualifying criteria ahead of the application which we can prepare.
We can also complete the compliance statement which is required in order to become an approved investment, including support with the completion of the required documentation that needs to be submitted alongside the form, which includes the documents below:
The business plan and financial forecasts
A copy of the latest accounts
An explanation of how you meet the risk to capital condition
Details of all trading and activities to be carried out, and how much you expect to spend on each activity
An up to date copy of the memorandum and articles of association
The information memorandum, prospectus or other documents used to explain the fundraising proposal to your investors
Details of any other agreements between your company and the shareholder
A list of the amounts, dates and venture capital schemes under which you’ve previously received investment
Any other documents to show you meet the qualifying conditions
What do I need to know as an investor in an Enterprise Investment Scheme (EIS) company?
Please see below a summary of the requirements and benefits for an investor investing in an EIS company.
What are the income tax benefits of making a qualifying investment?
Income tax reducer of up to 30% is available for an induvial. This is up to a maximum annual investment amount of £1million or £2million if at least £1milion is invested in knowledge-intensive companies. This is only available for qualifying investors.
To be eligible, an individual must:
Not be connected with the company (directly or together with associates hold less than 30% of the ordinary share capital)
Not be an existing shareholder in the company
Hold the shares for at least the minimum holding period (three years from the date of the share issue/date the qualifying trade commenced)
When may the income tax relief be withdrawn?
Should any of the following occur within 3 years of subscription, income tax relief is withdrawn:
The shares are gifted or sold to someone other than the spouse / civil partner
The investor is granted an option binding the grantor to buy the shares or the investor grants an option which on exercise obliges them to sell the shares
The investor or their ‘associate’ receives ‘value’ from the company, or a person connected with the company, see below
The company repays or repurchases share capital from any shareholder
The investor carried on the trade prior to the trade, trading assets or share capital being acquired by the company
The investor or an ‘associate’ of the investor becomes ‘connected’ with the company
Relief is subsequently found not to be due (ie use of the money raised requirements are not met or the company ceases to be qualifying)
Investors must notify HMRC within 60 days of any disqualifying event.
What happens if I sell my EIS shares for a profit?
Provided income tax relief has not been withdrawn (i.e. shares are held for at least 3 years) then any gain arising are free from capital gains tax.
What happens if I make a loss on my EIS investment?
An allowable loss may arise on the disposal of EIS shares. The allowable loss is reduced by the income tax relief that has already been provided, reducing the cost allowable in calculating the loss.
The loss can be set off against other capital gains. Alternatively, a claim can be made to set the loss from other total income either in the year of the loss or the preceding year.
Are there any other tax benefits with the Enterprise Investment Scheme (EIS)?
Capital gains tax deferral relief is available. This claim can be made to hold-over/delayed until the EIS qualifying shares are disposed of. The EIS shares must have been issued one year before and three years after the gain accrues. The claim is required to be declared on the individuals tax return.
Further reading on the Enterprise Investment Scheme (EIS)
From HMRC: Apply to use the Enterprise Investment Scheme to raise money for your company →
From British Business Bank: What is the Enterprise Investment Scheme (EIS)? →
From Octopus Investments: A complete guide to the Enterprise Investment Scheme (EIS) →
