Enterprise Investment Scheme

The government has introduced tax breaks through the Enterprise Investment Scheme (EIS) to encourage those considering making business investments to go ahead with a greater level of confidence. It presents a buffer against potential losses and is proving a popular scheme with entrepreneurial investors.

If you’re among them, with cash to invest and a keen eye for a healthy return, you will want to consider the following points.

Qualifying and Excluded Trades

Not all business ventures qualify for inclusion in the EIS. Amongst those excluded are:

  • Banking
  • Leasing
  • Legal services
  • Accounting services
  • Farming
  • Forestry
  • Hotels
  • Property Development
  • Nursing Homes 
  • Shipbuilding
  • Steel production
  • Coal productions
  • Feed-in Tariff electricity generation or exporting.

Most other types of business will qualify for inclusion in the scheme on the understanding that the company intends to develop and grow its business interest over the long term. 

Companies permitted to raise more funds through the scheme include knowledge-intensive companies such as those with a higher research and development spend, or the creation of intellectual property. Most companies within the scheme would be considered risky ventures, so there is also the understanding that investors are taking considerable risks, realising they could lose more of their invested capital than they get back from other returns from the investment.

Risk to Capital Test

Recent changes to the EIS scheme now demand that a new ‘risk to capital’ test is performed when new shares are issued. It will establish that the investment is risky enough to deserve extra tax relief and will take into account the share prospectus along with any publicity material.

The risk and return refers specifically to investors, with loss referring to some or all of the invested capital and return being the net investment return. This takes into account growth of capital and the value of the EIS relief obtained.

Benefits to the Qualifying Company

In order to benefit the companies most in need of investment, certain criteria must be met.

  • Companies must have gross assets of below £15 million before the scheme starts.
  • Assets following investment must remain below £16 million.
  • Companies can employ no more than 250 staff members.

For companies that do qualify, EIS offers a unique opportunity to raise finances for either start-up or expansion.

EIS Scheme Rules

As well as the initial qualifying criteria a company must meet in order to benefit from the scheme, there are a few other stipulations. These conditions must be met throughout the 3-year period. The company must:

  • Have a permanent base in the UK.
  • Be engaged in a qualifying trade.
  • Not be part of a scheme to avoid tax.
  • Exist for genuine business reasons.
  • Not be under the control of another company.
  • Not be a 51% subsidiary of any other company.
  • Be an unquoted company.
  • Have only fully-paid issued shares.
  • Use the money raised through the EIS share issue only for the qualifying business activity.
  • In order to attract tax relief, schemes cannot involve any guarantees or exit arrangements.

There are also certain criteria regarding who can invest under the scheme:

  • An investor cannot own more than 30% of the shares either directly or indirectly.
  • Investors who are paid employees or directors of the EIS company cannot normally claim EIS relief. In some circumstances, investors can receive a ‘normal and reasonable’ remuneration for their work.

Options to Minimise Risk

The scheme recognises that not all investors wish to pour all their available funds into one company. Alternatives exist to help potential investors spread their risk by subscribing to an EIS approved investment fund or Venture Capital Trust (VCT).

Approved investment funds employ a fund manager to collate the total sum from a number of subscribers to the fund. The subscriber’s money is then allocated, by the manager, between a number of different companies.

Benefits and Gains for the Investor

It’s possible for the investor to realise a total deferral and tax saving of 60% of the initial investment. This is achieved through the following incentives:

  • After three years, any gain from the sale of shares is exempt from capital gains tax as long as all income tax has been claimed.
  • The deferral of capital gains, with no limit, on other assets by reinvesting some (or all) of the gain into an EIS company. This must happen within three years before or one year after the gain was accrued. Certain events may mean capital gains tax becomes chargeable at a later date.
  • Qualifying investments up to £1million per year attract 30% income tax relief. Certain events, such as shares sold, may trigger a withdrawal of EIS relief.
  • Investing in knowledge intensive companies attracts a further £1 million allowance per investor, provided the investment exceeds £1 million.
  • Relief against capital gains tax, or income tax in some circumstances, for losses made on the disposal of EIS shares.

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Is the EIS right for you?

The Enterprise Investment Scheme offers potential investors the opportunity to facilitate the growth and development of qualifying companies. In addition, interested investors can get involved in the running of the business and receive appropriate payment for their work.

If this sounds like something you’d be interested in getting involved with, we’re here to offer more definitive advice regarding investment opportunities and some of the finer details with regard to qualifying industries, specific risks, returns and tax reliefs.

Contact us today – for advice on the Enterprise Investment Scheme.

We have the resources, the experts, the knowledge and experience to help your business grow. And with over 1,000 accountancy clients in the UK and London, the volume of our work allows us to share economies of scale with you.