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The Government created the Enterprise Investment Scheme (EIS) as a way of encouraging investors to back relatively early-stage, private companies via equity finance. Here we review how companies and investors can qualify: and what tax reliefs are available.
The idea of EIS is to overcome the natural resistance of investors towards backing high-risk businesses, rather than investing in just any company. As you might expect, there are many restrictions on the types of firms that can qualify – the following categories are excluded
The idea is to draw in external finance and not to be a tax benefit for currently connected parties. Thus these types of potential investor cannot apply for EIS (although there are rules whereby business angels are able to qualify and be appointed as directors):
Investors who support EIS Companies gain these tax reliefs:
Note that it is the venture capital investor or ‘angel’ who stands to benefit from tax advantages – the company does not – but of course it is made much more attractive to high net worth individuals who are seeking a mixture of investments to add to their portfolio. Thus it has a much better chance of raising fresh capital.
Maximum £5m in any 12-month period and £12m lifetime total, from:
Because young developing companies are the target for EIS, if your firm has traded for 7 years or more (and has not already raised money through issuing EIS, SEIS or VCT shares) you do not qualify.
The exception is if you raise EIS or VCT money totalling 50% or more of your 5-year average turnover: and you must use that money to launch a new product or enter into a new market in geographic terms.
Your company must:
At Share Issue and then for a 3-year period:
The company must issue EIS shares as ordinary or non-cumulative fixed preference shares with full risk.
There must be no loans tied to the issue.
No specific protections can be afforded to the new investors.
Investors in such schemes are regarded as being sophisticated and being aware of the risks. Nevertheless, there are unknowns and HMRC does offer what it terms as ‘advance assurance’ on a given scheme, which can provide some assistance to hesitant venture capitalists.
Four months after the share issue (assuming that it is trading all of that time) the Company completes declaration form EIS1 for HMRC to declare investor details.
When HMRC approves the details, the Company is permitted to issue certificate EIS3 to the new investors. This is essential for the claiming of the individuals’ tax relief.
As a specialist company accountant, Odiri Tax Consultants and accountants is a firm that understands your financing needs and can guide you through the maze of EIS and other investment incentives that can help you to grow successfully.