What is EIS?
The Enterprise Investment Scheme (“EIS”) is a government scheme that provides a range of generous tax reliefs for UK investors who subscribe for shares in startups and early-stage businesses.
Since its inception in 1994, more than 24,500 individual companies have raised over £14 billion of investment through the scheme.
EIS Reliefs Explained
A bundle of reliefs relating to Income Tax, Capital Gains Tax and Inheritance Tax liabilities are available to UK taxpayers who invest in EIS-qualifying companies.
- 30% of the cost of the shares can be set against the individual’s Income Tax liability.
- Gains made in relation to the shares in the EIS-qualifying company are free from Capital Gains Tax.
- Losses made upon the disposal of the shares can be offset against Income Tax liability.
- If gains made in relation to the disposal of other assets are invested in EIS companies, the Capital Gains Tax liability can be deferred until the EIS shares are disposed of.
- Inheritance Tax does not apply to the shares.
Criteria for the issuing company
The rules relating to the EIS reliefs are complex and companies raising investment through EIS must satisfy a number of conditions when the shares are issued.
A number of the conditions must continue to be satisfied for a number of years after the shares are issued.
What is a qualifying company?
- The issuing company must have a permanent establishment in the UK.
- The issuing company must not have more than 250 employees (this limit is 500 employees for knowledge-intensive companies).
- The issuing company must not be listed on the London Stock Exchange or any other recognised stock exchange.
- The issuing company must not have gross assets that exceed £15 million before the shares are issued and £16 million immediately after the shares are issued.
- The issuing company (or the corporate group that it belongs to) must carry out a qualifying trade. For a trade to be qualifying, it must be conducted on a commercial basis and with a view to making profits. It must also not consist wholly or as to a substantial part in the carrying out of ‘excluded activities’. See https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm3010 for a description of the excluded activities.
- If the issuing company has subsidiaries, the subsidiaries must all be qualifying subsidiaries.
- The issuing company must not be a 51% subsidiary of another company or under the control of another company.
- The issuing company must not raise more than £5m through EIS, Seed Enterprise Investment Scheme (“SEIS”), Venture Capital Trust (“VCT”) and/or any other scheme that qualifies as state aid investment in the year the shares are issued.
- The issuing company must not raise more than £12 million through EIS, SEIS, VCT, Social Investment Tax Relief and/or any other scheme that qualifies as risk capital under the European Commission’s state aid rules. This limit is £20 million for knowledge-intensive companies. There are additional conditions that apply if the monies raised are to purchase a subsidiary or given to a subsidiary.
- The company must not be in financial difficulties.
There are other additional conditions relating to the shares being issued and how the money being raised is used.
For more detailed information about EIS, see www.hmrc.gov.uk/eis.
To obtain ‘qualifying status’ you must apply for official approval from HMRC after you issue the shares.
Understandably, investors wanting to take advantage of the EIS reliefs are reluctant to invest until they receive some assurance that the investment will qualify for EIS relief. To help, the HMRC Small Company Enterprise Centre will confirm, in advance of issuing shares, whether your company and its shares are likely to satisfy the EIS rules.
Response times vary depending upon the complexity of your business but it is usual for HMRC to respond within 15 days.
EIS tax benefits are extremely attractive, the majority of opportunities offered on the VentureFounders platform satisfy the rules of EIS investments. It is also important that the company does not do anything to jeopardise its status as a qualifying EIS company.
As a result, we expect all EIS companies on our platform to give us an undertaking that they will, amongst other things, remain a qualifying company.
PLEASE NOTE: The availability of any tax relief, including EIS, depends on the individual circumstances of each investor, the shares being issued and of the company concerned. This sets out our understanding of tax legislation and HMRC practice as at June 2016. However, the rules may be subject to change in the future. If you are in any doubt about EIS, you should obtain independent tax advice before doing, or refraining from doing, anything.