The Enterprise Investment Scheme (EIS) is a government scheme designed to encourage investment in small businesses. In short, the EIS allows you to claim tax relief of 30% on investments in certain small businesses, providing the companies in question fulfil a number of different criteria. The EIS makes investing in small businesses much more appealing – since being launched in the year 1993-94, over 24,620 companies have received funding as part of the scheme, and nearly £14.2 billion in capital has been raised as a result of the EIS. Here’s our guide to making the most of the EIS, whether you’re an investor or an entrepreneur.
HOW THE ENTERPRISE INVESTMENT SCHEME WORKS FOR INVESTORS
Investors can claim relief against their income tax liability for the year in which shares were issued. This relief is set at 30% of the value of the shares. Since April 2012 there is no minimum investment figure required to qualify an investor for EIS relief. However, there is a maximum figure of £1,000,000 in any one year. There is some leeway in when shares are treated as having been acquired – there is a carryback facility which means that they can be considered to have been issued in the previous tax year to the one they actually were.
The EIS also qualifies you for a capital gains exemption on the value of the shares. When you dispose of your shares, you won’t have to pay capital gains tax on any gain you’ve made, as long as you have received income tax relief on those shares.
However, investors do have a number of obligations. They must usually retain shares for 3 years or income tax relief and capital gains exemption will be withdrawn. There can be no reciprocal arrangements – you can’t agree to invest in someone else’s company on the understanding that they will invest in yours, allowing you both to claim tax relief. You can’t be connected to the company through financial interests or employment unless you’re a business angel serving on the board of directors and receiving no remuneration. Tax relief can be withdrawn if you fail to meet these criteria at any part while you hold the shares, or if the company loses its qualifying status.
WHICH BUSINESSES QUALIFY FOR THE ENTERPRISE INVESTMENT SCHEME?
The business in question must have fewer than 250 employees and no more than £15 million in gross assets immediately before the shares are issued. It can’t be listed on a public stock exchange, nor can there be any plans for such a listing at the time that shares are issued. However, if the company is later listed, investors can still claim EIS tax relief – what’s important is that the listing wasn’t planned when shares were issued.
It must not be controlled by another company, and there are restrictions on the subsidiaries the company itself can control to qualify – in general, any subsidiaries must themselves qualify for the EIS if the parent company is also to be eligible for the scheme.
No more than £5 million can be raised over a 12-month period from any venture capital scheme – that includes, for example, the Seed Enterprise Investment Scheme (SEIS) as well as the EIS. The funding received must be used for trading purposes, or for research and development or acquisitions which will lead to trading.
HOW YOUR BUSINESS CAN JOIN THE ENTERPRISE INVESTMENT SCHEME
Since the EIS is so appealing for investors, eligibility for the scheme provides a significant boost to your business and its funding prospects. But before you can use the scheme, you must fulfil certain obligations.
Before seeking funding through the EIS, you should first secure Advance Assurance through HMRC. For their clients, DUA obtains this and corresponds with HMRC on your behalf. So it is comforting to know that they communicate with HMRC and work towards reviewing this on behalf of the company.
Once you’ve received Advance Assurance, your company must go through a 4-month qualifying period of normal trading. After that period, you will be able to submit the EIS1 form, a compliance statement confirming that you qualify for the EIS. HMRC will then send you an EIS2 form, confirming that you qualify for the EIS, and enough EIS3 forms for your shareholders to use.
The EIS benefits investors and companies, so it’s worth signing up for if you qualify.EIS allows you to invest tax efficiencies in small qualifying businesses. It is however important to be careful to due diligence and be sure the business plan is robust and there is a good chance of success. If you have any questions about your business’s eligibility for EIS, or how your investments can benefit from the scheme, please get in touch with us. DUA are experienced accountants in Watford who have the expertise to guide you through the Enterprise Investment Scheme – book an appointment if you’d like to find out more.