What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a UK government initiative designed to assist smaller, high-risk trading companies in raising capital. It offers substantial EIS tax relief to individual investors who purchase new shares in these firms. This incentive encourages investment in small, unquoted companies that require funds for their growth and development.

Who is EIS For?

EIS caters to:

• Investors: Individuals seeking significant EIS tax relief by investing in high-potential, high-risk companies.
• Companies: Small to medium-sized enterprises (SMEs) looking to secure investment to fuel their expansion.

Eligibility Criteria for Companies under EIS

To be eligible for the Enterprise Investment Scheme (EIS), a company must fulfil several criteria. Here’s a detailed breakdown:

Basic Requirements

• UK-Based: The company must have a permanent establishment in the UK.
• Unquoted Status: The company must not be listed on any recognised stock exchange, although AIM is acceptable.
• Gross Assets: The company must have gross assets of £15 million or less before issuing shares and not exceed £16 million immediately after the share issue.
• Employee Count: The company must have fewer than 250 employees at the time of share issuance.
• Age of Company: Generally, the company must be within seven years of its first commercial sale.

Qualifying Trades

• The company must carry on a qualifying trade, excluding activities such as dealing in land, commodities or shares, banking, insurance, leasing, and legal or accounting services.

Use of Funds

• Funds raised must be used for growth and development, not for acquiring another business or entity.

Risk to Capital

• Investments must meet the ‘risk to capital’ condition, meaning the company’s activities should be intended to grow and develop the business, with a significant risk of losing more than half of the invested capital.

Specific Examples

1.     Tech Start-Up:

A UK-based tech start-up aims to raise £2 million through EIS. The company, which meets the asset and employee criteria, operates within the tech sector—a qualifying trade. Furthermore, it plans to use the funds for product development, aligning with the growth and risk conditions. Consequently, the start-up is well-positioned to benefit from the EIS, attracting investors looking for significant tax relief while supporting innovative advancements.

2.     Retail Business:

A retail business with six years of operation seeks to raise £3 million. This company, having gross assets of £14 million and 200 employees, meets the fundamental EIS requirements. Since it operates within a qualifying trade and plans to use the funds to expand its online presence, it qualifies for EIS. As a result, the business can leverage EIS to attract investment and drive its growth initiatives.

How Apex Accountants Can Help

Apex Accountants offer expert advice on navigating the EIS application process, including:

• Advance Assurance: Assisting in securing advance assurance from HMRC to assure investors that the company qualifies for EIS.
• Compliance: Ensuring the company meets all necessary criteria before and after the investment to maintain EIS status.
• Documentation: Helping prepare required documents such as business plans and financial forecasts to support the application.

Worked Example:

• Scenario: A digital marketing firm plans to raise £1.5 million. Apex Accountants review the company’s structure and advise on adjustments to meet EIS criteria, such as modifying the business plan to highlight growth.
• Outcome: The company secures advance assurance and successfully raises the funds, benefiting from the EIS tax relief.

Investor Eligibility for EIS

To be eligible for EIS, investors must meet specific criteria:

Basic Requirements

• Individual Investor: EIS relief is available only to individuals, not corporate entities.
• New Shares: The investor must subscribe to newly issued shares, paid in full and in cash.
• No Substantial Interest: The investor must not hold more than a 30% stake in the company, including shares owned by associates.

Exceptions for Directors

• Unpaid Directors: Investors who are directors can qualify if they are unpaid.
• Business Angels: Directors who are ‘business angels’ can qualify for EIS tax relief even if they receive remuneration, provided they were not connected with the company before the share issue.

Substantial Interest

• 30% Rule: Having a substantial interest means owning more than 30% of the company’s ordinary share capital, voting rights, or assets in the event of a winding-up.

Worked Example:

• Scenario: Emma plans to invest £100,000 in an EIS-qualified start-up. She seeks advance assurance and detailed compliance advice.
• Outcome: With Apex Accountants’ assistance, Emma secures advance assurance, invests confidently, and claims her 30% income tax relief. As a result, she saves £30,000 on her tax bill.

Tax Reliefs under the Enterprise Investment Scheme (EIS)

EIS offers several tax reliefs designed to encourage investment in high-risk companies. Here’s a detailed look:

Income Tax Relief

EIS investors can claim 30% income tax relief on investments up to £1 million per tax year. This limit increases to £2 million if the excess over £1 million is invested in ‘knowledge-intensive’ companies. For example, investing £100,000 in an EIS-qualifying company reduces the income tax bill by £30,000.

Capital Gains Tax (CGT) Exemption

Any gain on EIS shares held for at least three years is exempt from CGT. For instance, a £50,000 investment growing to £150,000 and sold after three years results in a tax-free £100,000 profit.

CGT Deferral Relief

CGT on gains from other asset disposals can be deferred by reinvesting in EIS shares. For example, selling a property with a £200,000 gain and reinvesting in EIS shares defers the CGT due on this gain.

Inheritance Tax Relief

EIS shares held for at least two years and at the time of death qualify for 100% inheritance tax relief. Consequently, investing in EIS shares can reduce the taxable value of your estate, saving 40% in inheritance tax.

Loss Relief

If an EIS investment results in a loss, it can be offset against income tax. For example, a £100,000 investment that fails can yield up to £31,500 in tax relief for a 45% taxpayer, reducing the net loss to £38,500 after the initial income tax relief.

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Practical Advice for Maximising EIS Benefits

• Advance Assurance: Obtain advance assurance from HMRC to ensure your investment qualifies for EIS.
• Hold for Three Years: Ensure you hold your shares for at least three years to benefit from CGT exemption and avoid losing income tax relief.
• Diversify Investments: Spread investments across multiple EIS-qualifying companies to balance risk and maximise tax benefits.

Worked Example:

• Scenario: Sarah invests £100,000 in a tech start-up through EIS. Apex Accountants help her secure advance assurance and ensure compliance.
• Outcome: Sarah claims £30,000 income tax relief, defers CGT on a previous gain, and her investment grows tax-free after three years.

EIS Investment Process: Step-by-Step Guide

Investing through the Enterprise Investment Scheme (EIS) involves several key steps:

Seeking Advance Assurance:

• Purpose: Provides a provisional indication from HMRC that your investment will qualify for EIS relief.
• Process: Prepare and submit documentation, including business plans and financial forecasts, to HMRC.

For instance, ABC Tech Ltd seeks to raise £1 million. They receive advance assurance from HMRC, which attracts more investors.

Making the Investment:

• Criteria: Investments must be in new, fully paid ordinary shares, and funds should be used for growth and development.

For example, an investor purchases £100,000 worth of new shares in XYZ Innovations.

Post-Investment Compliance:

• Action Required: Ensure the company continues to meet EIS criteria for at least three years.

Thus, XYZ Innovations uses the investment to develop a new product line, adhering to EIS criteria.

Issuing EIS Certificates:

• Step-by-Step: After four months, the company submits a compliance statement to HMRC and issues EIS3 certificates to investors.

Consequently, XYZ Innovations begins issuing EIS3 certificates, allowing investors to claim tax relief.

Claiming Tax Relief:

• Procedure: Investors use EIS3 certificates to claim income tax relief, which can be claimed in the tax year of the investment or carried back.

For instance, an investor with a £100,000 investment claims £30,000 income tax reduction using their EIS3 certificate.

Worked Example:

• Scenario: GreenTech Ltd plans to raise £500,000 through EIS.
• Support from Apex: Apex helps secure advance assurance, guides compliance, and assists in issuing EIS3 certificates.
• Outcome: Investors in GreenTech Ltd. successfully claim their tax reliefs with Apex’s expertise.

Investment Risks of the Enterprise Investment Scheme (EIS)

Investing through EIS involves both risks and benefits:

Potential for Loss:

• High-Risk Investments: EIS targets early-stage companies with higher failure rates, posing a significant risk of losing the entire investment.

For example, an investor putting £50,000 into a startup that fails may face substantial net losses.

Benefits:

• Tax Reliefs: EIS offers income tax relief, CGT deferral, and inheritance tax relief, providing potential tax benefits despite investment risks.

For instance, an investor in a high-risk company can offset losses and claim significant tax reliefs.

Risk Management Strategies:

• Diversify Investments: Spread investments across multiple EIS-qualifying companies to manage risk and mitigate potential losses.
• Thorough Due Diligence: Conduct detailed research and consult with advisors to assess the potential and risks of companies.

Worked Example:

• Scenario: John invests £200,000 in several EIS-qualified companies, diversifying his portfolio to manage risk.
• Support from Apex: Apex Accountants provides due diligence and risk assessment to ensure John’s investments meet EIS criteria and offer potential tax benefits.

Outcome: John balances risk through diversification, enjoying potential tax advantages while managing overall investment risk