What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme  is ideal for helping small businesses engaged in high-risk trading to get capital. This UK scheme provides EIS tax relief to investors, motivating them to fund small-scale companies. With this money, companies are able to expand their businesses. 

Apex Accountants has 20 years of experience providing EIS support to companies and investors. We will assist you with an enterprise investment scheme, tax relief, and planning so you can limit your costs and maximise your profits. 

Who is EIS For? 

EIS investment scheme​ caters to: 

• Investors: Particularly those looking to reduce tax through the enterprise investment scheme tax relief.
• Companies: small- to medium-sized companies that are considered high-potential and high-risk. 

EIS Eligible Companies

A company needs to complete certain requirements in order to qualify for the Enterprise Investment Scheme (EIS)

Basic Requirements 

• UK-Based: The company must be based in the UK indefinitely. 
• Unquoted Status: The company should be a part of the stock exchange. In certain cases, AIM is also allowed. 
• Gross Assets: Gross assets of the enterprise should amount to £15 million or less at the time of issuing shares. The assets should not be more than £16 million upon share allocation. 
• Employee Count: The company should have less than 50 employees at the time of application. 
• Age of Company: It is advisable for the company to be within the seven-year limit of its first sale when applying for the scheme. 

Qualifying Trades 

• The company needs to continue a trade that qualifies within the EIS investment scheme​. Activities like dealing in land, commodities, or shares; banking; insurance; leasing; and legal or accounting services do not qualify.

Use of Funds 

• Money should be used for innovation and development.

Risk to Capital 

• Anyone thinking of investing in the scheme must fulfil the ‘risk to capital’ condition. This means that the company should focus on growth and development and be prepared to lose a large chunk of investment. 

Specific Examples 

1. Tech Start-Up:  

A UK-based tech start-up wants £2 million and to be part of  the EIS scheme. The company meets the asset and employee criteria and is part of the tech sector. It wants to use the money for new product creation, which is in accordance with the risk and growth conditions of EIS-eligible companies.  The start-up is well-positioned to benefit from the EIS and attract investors.

2. Retail Business:  

A retail company, which has been operating for six years, seeks to raise £3 million. This company has gross assets of £14 million and 200 employees. This amount is in line with the EIS eligibility requirements. Retail is a qualifying trade, and the company wants to use the money to expand its online presence; it qualifies for EIS. As a result, the business can use EIS to grow its trade. 

How Apex Accountants Can Help With EIS Eligibility and Application Process

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

• Advance Assurance: We assist clients in getting advance assurance from HMRC. This indicates to investors that the company is qualifying for EIS. 
• Compliance: Make sure the company meets all criteria before and after the investment. 
• Documentation: Helping prepare documents like the business plans and financial forecasts to support the application. 

Worked Example: 

• Scenario: A digital marketing company wants to make £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. 

Smart Ways to Invest in EIS Companies

At Apex Accountants, we assist companies in identifying the best investment course to choose as part of the Enterprise Investment Scheme (EIS). Generally companies follow three paths:

• Direct Investment – Involves putting funds towards a single EIS qualified company. This is great for investors who have the knowledge and time to research the sector. 
• EIS Funds or Managed Portfolios – Investors can reduce risk if they put their money in a fund that is managed by someone with expertise and experience with EIS.
• Angel Networks or Syndicates – In this instance, investors can join funds and invest mutually in a company. This divides the costs and profits. 

Whichever route you decide upon, we will help you set it up and plan for future strategies. 

Investor Eligibility for EIS in the UK

To qualify for EIS, investors need to meet certain rules: 

Basic Requirements 

• Individual Investor: EIS relief can only be availed by individual investors and not institutions. 
• New Shares: Investors can only opt for shares that have been recently issued and paid in cash. 
• No Substantial Interest: An individual investor can hold a maximum of 30% stakes in the company. This involves the shares held by associates. 

Exceptions for Directors 

• Unpaid Directors: A company’s director can also become an investor under this scheme only if they are not paid a regular wage. 
• Business Angels: Directors who are ‘business angels’ can also be a part of the tax scheme, even if they receive income. However, the catch is that they should not have been connected to the company before the shares were issued.

Substantial Interest 

• 30% Rule: Having majority shares can lead to many benefits. Such individuals not only control 30% of the company’s ordinary shares but also receive voting rights and assets in case of a wind-up. 

Worked Example: 

• Scenario: Emma wants to invest £100,000 in an EIS certified company. She needs assurance regarding her decision and comprehensive financial advice. 
• Outcome: Apex Accountants can help Emma receive advance assurance. Due to this, she will be able to receive tax benefits and save almost £30,000.

How Investing in Small Companies Can Reduce Your Tax Bill

Apex Accountants help investors fund high-growth companies in the early years of their life. The Enterprise Investment Scheme (EIS) is ideal for availing tax benefits. 

By putting your money in small companies that follow EIS regulations, you will limit risks. Some of the benefits of this government-backed scheme include 

• Income tax relief Almost 30% relief. This means that you can save almost £3,000 if you invest £10,000.
• Annual investment allowance If you invest almost £2 million in companies that are part of the knowledge sector, you can receive benefits of between £1 and £2 million.
• Tax-free capital gains if the enterprise is successful, you will be able to keep your investments for a minimum of 3 years. 
• Capital gains deferral, being a part of this scheme means that you will have to postpone
• Loss relief in case your investment is unsuccessful, you can limit your tax. 
• Inheritance tax exemption if you have company shares for more than 2 years and meet the requirements for business property relief, you can benefit from this exemption. 

Investing in startups and small companies can be risky. But the EIS schemes provide structure and support needed to make the most of your finances. It allows companies to reduce tax payable. 

Apex Accountants can help you with the process so you make the right decision for your business. 

Tax Reliefs under the Enterprise Investment Scheme (EIS) 

EIS provides many tax benefits that promote investors. Some of them include. 

Income Tax Relief 

If an EIS investor has given almost £1million funds, they will receive a relief of 30% on income tax. In the case of knowledge-intensive companies, an investment of £2 million is needed to avail a discount on income tax. For example, if you invest upwards of £100,000, your income tax will decrease by £30,000. 

Capital Gains Tax (CGT) Exemption 

If you have been making gains on EIS qualified shares for almost three years, you do not have to pay CGT. For example, if you have contributed £50,000 to the scheme, which has increased to £150,000 in the past three months, you can get a benefit of almost £100,000. 

CGT Deferral Relief 

If you have invested in an EIS scheme, you can defer paying capital gains tax. This means that if you sell an asset worth £200,000 and reinvest that sum in an  EIS scheme you can delay CGT on the amount. 

Inheritance Tax Relief 

If someone has EIS shares that they have acquired for two years at the time of their death, that amount will be safe from inheritance tax deductions. Moreover, if you have invested in EIS schemes, you can decrease the taxable value of your asset and save almost 40%.

Loss Relief 

In case your EIS investment falls at a loss, you can cancel it out against income tax. For example, an investment of £100,000 is eligible for tax relief for a taxpayer who pays 45% tax. This means that you can save up to £31,500 in tax relief. 

Get Free Consultation

Call Anytime 0203 883 4777

Get Free Consultation

Practical Advice for Maximising EIS Benefits 

• Advance Assurance: You can get assurance from HMRC prior to investing that will safeguard your EIS investment. 
• Hold for Three Years: It is advisable to keep EIS shares for a minimum of 3 years. This way you will be exempt from CGT tax. 
• Diversify Investments: You can invest your funds in many different EIS schemes so that you are diversifying your investment portfolio and reducing risk.

Worked Example: 

• Scenario: Sarah puts £100,000 in a tech start-up that is EIS-qualified. We will make sure you get prior assurance from HMRC and are following all investment rules. 
• Outcome: Sarah is able to save £30,000 in income tax relief and delay her CGT. After three years of investment, Sarah is free from paying any taxes. 

Knowledge-Intensive Companies for EIS 

At Apex Accountants, we assist companies in applying for Enterprise Investment Scheme (EIS) benefits. If you are operating a company involved in research or development innovation, and if your company has intellectual property for growth, this scheme is perfect for you. You have the opportunity to apply for recognition as a knowledge-intensive company, which entitles you to numerous benefits under the EIS scheme. 

To qualify as a knowledge-intensive company, you must meet the following criteria:

• Have less than 500 employees.
• Create intellectual property that will generate revenue in the coming years. 
• Almost 20% of your employees should be in R&D roles; for example, they must have a master’s degree or equivalent. You should hold this position for at least 3 years after investment. 

Why this matters for EIS 

Knowledge-intensive companies’ many rules are relaxed.  For example:

• You can make almost £20 million in EIS funding throughout your company’s operations. This is double the usual value. 
• Your company is eligible for the scheme even if it’s been in business for more than seven years.
• Investors can get high individual investment limits.

To make the most of this opportunity, your business should be innovating and involved in research and development. Additionally, your first sale must exceed £200,000 and should have occurred within the last ten years. 

Apex Accountants can assist businesses with the application and qualification processes. We make sure that you are following all regulations and benefit from the funding available. Some of the benefits you will receive include. 

EIS Investment Process: Step-by-Step Guide 

Investing through the Enterprise Investment Scheme (EIS) contains the following steps. 

Seeking Advance Assurance: 

• Purpose: This is beneficial because it guarantees that HMRC will confirm your investment for EIS relief. 
• Process: You need to gather documents, including your business plans and forecasts, and fill out the relevant forms required by HMRC.

For example, a company, ABC Tech Ltd, wants to raise £1 million. If ABC Tech Ltd obtains an advanced assurance from HMRC, potential investors will be more interested. 

Making the Investment: 

• Criteria: Investments should be in new, fully paid ordinary shares. Money from this scheme should exclusively be used for growth and development. 

For example, an investor buys £100,000 in shares from XYZ Innovations. 

Post-Investment Compliance: 

• Action Required: Companies must adhere to EIS guidelines for a minimum of three years after receiving the funds.

The company XYZ Innovations will use the funds to create new products that follow EIS rules. 

Issuing EIS Certificates: 

• Step-by-Step: After four months, a company should provide a compliance statement to HMRC and EIS3 certificates to its investors.

So, XYZ Innovations starts to give out EIS3 certificates to its investors, which will qualify them for tax benefits. 

Claiming Enterprise Investment Scheme Tax Relief: 

• Procedure: Investors can use the EIS3 certificates to get income tax relief. However, this should be claimed during the tax year when the investment is made. 

For example, an investor with a £100,000 investment is allowed a £30,000 income tax reduction if they avail their EIS3 certificate in the same year.

Worked Example: 

• Scenario: GreenTech Ltd wants to get £500,000 funding through EIS. 
• Support from Apex: Apex Accountants can help the company get advanced assurance, organise company processes according to the EIS guidelines, and issue EIS3 certificates. 
• Outcome: The investors of GreenTech Ltd. are able to claim tax benefits. 

Investment Risks of the Enterprise Investment Scheme (EIS) 

Investing through EIS involves both risks and benefits: 

Potential for Loss: 

• High-Risk Investments: EIS scheme is for companies in the early stage of their life. These are usually companies with high failure rates and risks. 

For example, someone invests £50,000 into a company that faces losses, and so the investor is unable to make a profit. 

Benefits: 

• Tax Reliefs: The EIS provides income tax relief, delayed CGT, and inheritance tax relief. These are significant benefits. 

For example, an investor in a high-risk EIS company can balance losses from the savings in tax benefits. 

Risk Management Strategies: 

• Diversify Investments: To mitigate risks, spread your investments across numerous EIS-qualifying companies. 
• Thorough Due Diligence: It is advisable to conduct thorough research on the company and seek professional advice before investing. 

Worked Example: 

• Scenario: John invests £200,000 in many EIS-qualified companies. He has a diverse portfolio and is safe from risks. 
• Support from Apex: Apex Accountants offers due diligence and risk assessment services so John can make an informed decision. 
• Outcome: John reaps the benefits of diversification and tax reliefs. 

The Enterprise Investment Scheme (EIS) is an ideal tax-saving opportunity for many investors. Because of the fast-growing UK economy, there are many qualifying companies that are involved in research and innovation and require funds. However, becoming an EIS-qualifying company and investor is a complex process. Whether you are raising capital or investing, Apex Accountants offers clear, practical guidance. We partner with clients to deliver results. Contact us today!