Introduction
The Enterprise Investment Scheme (EIS) is a government-backed initiative designed to encourage investment into small, early-stage businesses by offering attractive tax reliefs to investors. For business owners, it is a valuable tool that can help raise the capital needed to grow and expand. This guide will walk you through how EIS works, the benefits it offers, eligibility criteria, and how to apply.
By the end of this guide, you’ll understand how EIS can benefit your business and how to ensure your company qualifies.
EIS At a Glance
EIS Tax Reliefs
- Income Tax Relief: Investors can claim up to 30% income tax relief on investments up to £1 million per tax year (or £2 million if invested in “knowledge-intensive” companies).
- Capital Gains Tax (CGT) Deferral Relief: Investors can defer capital gains if they reinvest any chargeable gain into an EIS-qualifying company.
- Tax-Free Gains: If shares are held for at least three years, any gains made on their sale are free from capital gains tax.
- Loss Relief: Investors can claim loss relief if the company doesn’t succeed, reducing the financial risk.
Learn more about EIS tax reliefs from HMRC- HMRC LINK HERE
Importance for Business Owners
For business owners, EIS can be a crucial tool for raising capital, particularly in the early stages of growth when funds are most needed. By offering attractive tax benefits, you can encourage investors to back your company. However, to benefit, your company must meet the specific EIS qualification criteria below.
How EIS Works
Investment Process
Under EIS, investors subscribe for new shares in a company that qualifies for EIS, benefitting from the tax reliefs outlined above. Once they invest, the company must meet ongoing compliance criteria to ensure investors retain their tax benefits.
Eligibility Criteria
To qualify for EIS, your company must:
- Have a permanent establishment in the UK.
- Be trading for no more than seven years when receiving its first EIS investment (exceptions apply).
- Have fewer than 250 full-time employees.
- Have gross assets worth less than £15 million before the investment and no more than £16 million after.
If you’re looking for further guidance on eligibility, our EIS experts can help.
Exclusions to Be Aware Of
Excluded Business Trades
Because EIS is intended to encourage investment in higher risk trading companies, a number of types of trade are excluded from EIS eligibility. These include amongst others:
- Dealing in land, shares, futures and other financial instruments
- Banking, insurance, money lending or other financial activities
- Providing legal or accountancy services
- Property development
- Hotels and nursing homes
- The generation or production of heat, electricity, power, fuel or gas
Excluded Investors
The purpose of EIS is to attract external investment from outside of the company/ Therefore, the scheme prohibits EIS relief to investors who are ‘connected’ to the company. This includes:
- Investors who are (or have associates who are) employees or directors of the company – although there are specific rules for certain ‘angel’ directors and investors.
- Investors who (together with their ‘associates’) hold more than 30 per cent of the company’s share capital
- Existing shareholders whose shares are not SEIS or EIS qualifying, or subscriber shares
The Seven-Year Rule
For companies that have been trading for more than seven years, EIS eligibility becomes more complex. You may still qualify if you meet specific conditions.
Qualifying Shares
The shares issued under EIS must be full-risk, ordinary shares. They cannot carry any special rights or guarantees, nor can linked loans or other arrangements protect investors from potential loss.
Benefits of EIS for Business Owners
Attracting Investors
EIS offers significant tax reliefs, making your business more attractive to investors by reducing their financial risk. This can give your company a competitive edge when seeking investment.
Access to Capital
EIS is designed to help early-stage businesses raise much-needed funds. Investors are more likely to take risks on smaller, high-potential companies if there is a strong EIS incentive.
Risk Mitigation
By offering loss relief and tax-free gains, EIS reduces the risk for investors, which in turn can help you secure funding more easily.
Other Benefits
EIS can also increase your business’s credibility, as qualifying for the scheme demonstrates to investors that your company is compliant with strict government regulations.
Challenges and Considerations
Complexity and Compliance
Maintaining EIS status requires ongoing compliance with HMRC rules, which can be complex. Failing to meet these can lead to investors losing their tax reliefs, which can damage investor relationships.
Cost and Time Involvement
Applying for EIS involves administrative costs and time. You will need to submit a detailed application to HMRC, along with necessary documentation, and ensure ongoing compliance.
Investor Expectations
EIS investors may have high expectations, particularly regarding company growth and returns. Managing these relationships is crucial to maintaining investor trust and confidence.
UK Business Case Studies – EIS Successes
Lots of high profile companies have successfully raised capital through EIS, including:
- BrewDog, the craft beer company, raised early-stage investment through EIS, which helped it grow into a global brand.
- Perkbox, a UK employee benefits platform, also benefited from EIS to fuel its growth.
Lessons Learned
These case studies highlight the importance of having a clear growth plan, maintaining compliance, and effectively communicating with investors.
Conclusion
EIS can be a powerful tool for business owners looking to attract investment and raise capital. By offering attractive tax reliefs, you can draw in investment and increase your chances of securing the funds needed for growth.
However, it requires careful planning and management. Business owners must consider the potential risks, particularly related to compliance, investor expectations, and the cost of maintaining EIS status.
EIS investment also provides attractive relief for investors and can be used as a tool to mitigate taxation.
If you’re considering EIS seeking professional advice is crucial. A specialist advisor can help you ensure that EIS is right for your business in the short, medium and longer term; that your business qualifies and that you stay compliant throughout the process.
Lack of advice, or poor advice can cost a company dearly on many levels. Get in touch today and speak to our EIS expert advisors for guidance and support.
Author: Michael Court Tax Director, Langtons.
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Michael Court, Tax Director
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