What is EIS?
EIS stands for Enterprise Investment Scheme, and this is a venture capital scheme that offers tax reliefs to investors, to encourage them to invest in start up companies where the funds will be used to grow and develop the business. These are high risk investments where a return cannot be guaranteed. There are certain criteria that need to be met by both the company and the individual investors to qualify.
Company Conditions
For the company to qualify it needs to meet the following criteria:
- Have a permanent establishment in the UK (e.g. incorporated in the UK or has a branch for a foreign entity)
- Not trading on the stock exchange at the time of share issue and no arrangement in existence at the time, for the company to cease being unquoted.
- Is not controlled by another company (i.e. more than 50% of the shares are owned by another company)
- Does not own shares in subsidiaries, other than qualifying subsidiaries. A qualifying subsidiary is one where the company owns more than 50% of the shares and no one other than your company or another qualifying subsidiary in the group can control the entity.
- Does not have gross assets over £15m prior to the share issue and no more than £16 immediately after the investment. If part of a group, this applies to the total group assets.
- Has less than 250 full-time employees at the date the shares are issued. If part of a group this applies to all employees in the group. Where the company qualifies as a Knowledge Intensive company this increases to 500 full-time employees.
- Conducts a qualifying trade and if part of a group, the majority of the group’s activities are qualifying trades.
- Has not been trading for more than 7 years, where an initial SEIS or EIS investment has not been received in the 7-year period. This is extended to 10 years for Knowledge Intensive qualifying companies.
Non-qualifying Trades
This is a list of the non-qualifying trades for EIS purposes. Please inform us if your company conducts any of these trades or an entity in the group is conducting these activities, where we do not act for this company. There are certain details for each of these non-qualifying trades that we will need to assess before determining whether a company could qualify for EIS.
- Coal or steel production
- Holding, managing or occupying woodlands
- Farming or market gardening
- Leasing activities
- Receiving royalties or license fees
- Legal or financial services
- Property development
- Dealing in land, shares or other financial instruments
- Running a hotel
- Running a nursing home
- Generation of energy, such as electricity and heat
- Production of gas or other fuel
- Exporting electricity
- Banking, insurance, debt or financing services
Limits on funds raised – Company
The maximum a company can raise under the EIS scheme is dependent on whether the company qualifies as a knowledge intensive business. We have detailed both limits below.
Not Knowledge Intensive
- £12m over the lifetime of the company
- £5m in any 12-month period
Knowledge intensive
- £20m over the lifetime of the company
- £10m in any 12-month period
The funds must be spent within 2 years of the investment and should be used for growth and development of the business. Where the qualifying activity has not yet commenced this can be extended to 2 years from the commencement of the qualifying trade.
The above limits include funds received from other venture capital schemes such as VCTs and SEIS, as well as state aid approved under the risk finance guidelines.
Knowledge Intensive Companies
To qualify as a Knowledge Intensive company a company must meet the following criteria:
- Carry out work to create intellectual property with the majority of your business coming from this within the next 10 years OR;
- Have at least 20% of employees carrying out research and development for the 3 years from the date of investment. The employees must be in a role that requires a Master’s or higher degree
- Spend 10% a year of your overall operating costs on research and development, for the 3 years following the date of investment or 15% in one of the 3 years where your company is less than 3 years old. If your company is more than 3 years old, then this should have been achieved in the 3 years prior to investment.
Risk to Capital Condition
Under EIS there is a risk to capital condition that must be met by the company for the investments to be eligible. The shares allotted cannot be redeemable and cannot carry special rights to assets. When issuing the shares there cannot be arrangements to protect the investor from risk, sell their shares at the end of the investment period (3-year period) or to invest the funds in the investor’s company. The shares also cannot be structured with preference rights over other shareholders.
Financial Health Requirement
For a company to be eligible for EIS the company cannot be in financial difficulty. HMRC deem a company to be in financial difficulty where it cannot pay its debts as they fall due and/or where the value of the company’s assets is less than the value of its liabilities. Where a company is raising outside of the 7- or 10-year initial investing period, HMRC will also deem an entity to be in financial difficulty where more than half of its subscribed share capital has disappeared due to accumulated losses.
Receipt of value
If investors have received income tax relief on their EIS investment and have later received value from the company during a specified period, then this can result in a withdrawal of income tax relief.
Examples of the circumstances in which you would be treated as receiving value from the company are if the company:
- Buys any shares or securities that you own
- Makes a payment to you for giving up the right to payment of a debt. This does not include ordinary trade debts
- Repays a debt owed to you, where this was incurred prior to subscribing for the shares
- Provides you with certain benefits or facilities
- Waives a liability of yours or an associate’s
- Discharges any such liability to a third party
- Lends you money which has not been repaid prior to subscription
Where the receipts are deemed to be of ‘insignificant’ value this will not cause a withdrawal of relief.
Investor conditions
Investors will not be eligible for EIS relief if they fall under any of the following:
- Employed by the company or a subsidiary in the group. There are special rules for directors so please let us know if the shares will be allotted to a director, so we can assess this in further detail.
- Hold more than 30% of the company’s shares, rights to assets and/or voting rights. This includes the individuals associates. Associates are individuals in your direct bloodline (parents, grandparents, children, grandchildren) as well as your spouse or civil partner and business partners.
- Already hold shares in the company which are not founder shares and are not SEIS or EIS qualifying.
The employment and 30% shareholding conditions apply for 2 years prior to the investment and for at least 3 years from the date of investment.
Limits on funds raised – Investor
The maximum an individual can invest under the EIS scheme is dependent on whether they are investing in knowledge intensive companies in the year. We have detailed both limits below.
Not investing in Knowledge Intensive companies
- £1m annual investment
Investing in Knowledge Intensive companies
- £2m annual investment if at least £1m is invested in knowledge intensive companies
Investor benefits
Under EIS there are many benefits the investor can receive and these are detailed below.
- Income tax relief of 30% on the investment value.
- Capital gains tax exemption when selling the shares if they have been held for more than 3 years. This is provided no income tax relief has been withdrawn.
- Capital gains tax deferral relief where EIS shares are issued in the period beginning one year and ending three years after the date of the capital disposal. The gain will become chargeable in the tax year when the EIS shares are disposed of.
- Exemption from inheritance tax provided the shares have been held for at least 2 years and certain conditions are met at the point of transfer.
- Loss relief against income or future capital gains where a loss is generated from the sale of the shares. This is restricted by the amount of EIS income tax relief still attributable to the shares disposed of.
Please contact the DRG Tax Department if you would like to discuss any of the above or check whether your company may qualify for the Enterprise Investment Scheme.
