The Enterprise Investment Scheme (EIS) is a progressive investor incentive scheme designed by the British government to fuel economic growth by encouraging investments in smaller, high-risk businesses and startups.
Understanding the EIS is vital if you’re a scaling business planning to raise essential capital. This guide will explore the key criteria for EIS eligibility and the scheme benefits. By the end, you’ll understand what it takes to qualify and how to make the most of the scheme.
What is EIS?
The Enterprise Investment Scheme (EIS) is a government-backed initiative to boost innovation by encouraging investment in growing companies. It offers tax relief to individual investors who purchase shares in qualifying companies.
EIS Eligibility Criteria
Companies must tick some core criteria boxes to qualify for the Enterprise Investment Scheme (EIS). Here’s what you need to know.
1. UK Presence
To qualify, your company must have a permanent presence in the UK. But you can have offices or have been incorporated abroad.
2. Less Than 7 Years Old
Companies up to seven years from their first commercial sale date can participate in the EIS. But if your business is part of a knowledge-intensive industry, such as cutting-edge research or technology, you’re granted an extended runway of up to ten years.
3. Staying within the EIS Size Limits
Your company’s gross assets must stay under £30 million before issuing shares and below £35 million immediately afterwards to qualify for EIS. Regarding your team, you’ll need fewer than 250 employees unless you’re in the knowledge-intensive category, where the limit stretches to 500.
4. Use of Funds
Securing funding through EIS isn’t just about ticking boxes. It’s about using the capital wisely. The EIS funds you raise must be directed towards prospering your business by:
- Growing a qualifying trade.
- Preparing to trade within the next two years.
- Pioneering research and development (R&D) that leads to something groundbreaking.
Funding Limits
Your company can raise up to £24 million through venture capital schemes such as EIS, SEIS and VCT, with an annual limit of £10 million across all funding sources, including subsidiaries and acquisitions. However, knowledge-intensive companies (KICs) benefit from more flexible EIS rules, allowing them to raise up to £40 million, capped at £20 million per financial year. This total includes any funds raised through other venture capital schemes.
EIS Eligibility: Investor Criteria
Investors looking to make use of the scheme must also meet specific EIS eligibility criteria. Here’s what you need to think about when approaching potential investors.
To benefit from EIS tax relief, investors will need to meet these conditions:
- No Employment Ties: Investors cannot be employees of the company they are investing in.
- No Vested Interests: Investors cannot have a significant interest in the company, such as owning more than 30% of its shares.
- No Related Investments: Investments must not involve prior arrangements or linked transactions.
- No Linked Loans: No loan arrangements should be tied to the investment.
- No Tax Avoidance: The investment must not be part of a tax avoidance scheme.
EIS Tax Benefits: Frequently Asked Questions
What is EIS Income Tax Relief?
By offering Enterprise Investment Scheme (EIS) shares, your investors can claim up to 30% income tax relief on their investment. This relief applies to investments up to £1 million annually, increasing to £2 million if at least £1 million is directed toward knowledge-intensive companies (KICs). Making investment in your business an attractive prospect.
Are EIS Shares Exempt from Capital Gains Tax?
Yes, any profits made by investors from selling EIS shares are exempt from capital gains tax (CGT), provided they hold the shares for a minimum of three years. This exemption can significantly enhance the tax efficiency of investing in your business.
What is Capital Gains Deferral Relief under EIS?
Your business can attract funds by allowing investors to defer 100% of CGT liabilities when they reinvest gains into your EIS-qualifying company. While the tax liability is deferred rather than eliminated, this benefit can incentivise reinvestment into your business.
Can Investors Claim Relief if Their EIS Shares Lose Value?
Yes, if your EIS investors sell their shares at a loss, they can claim loss relief against their income tax. This feature provides a financial safety net, reducing the perceived risk of investing in high-growth businesses.
Do EIS Shares Offer Inheritance Tax Relief?
EIS shares in your business can qualify for inheritance tax relief if held for at least two years. Under Business Property Relief (BPR), your investors’ heirs may face reduced tax liabilities, adding another layer of incentive for investment in your company.
What Else Should Businesses Know?
Time for Investors to Claim Relief: Your investors can claim EIS tax relief up to five years after investing. Ensure they are aware of this timeline to maximise the benefits of their participation in your business.
How Does SEIS Compare to EIS?
While the SEIS and EIS encourage investment in high-growth UK businesses, they cater to different stages of a company’s journey and operate with distinct rules. Below is a quick comparison of the two schemes:
SEIS:
Age of Company: Less than 3 years.
Maximum Investment: £250,000.
Tax Relief: 50% income tax relief.
Size Restrictions: Gross assets under £350,000; fewer than 25 employees.
EIS:
Age of Company: Up to 7 years since the first commercial sale
(10 years for knowledge-intensive companies).
Maximum Investment: £24 million (£40 million for knowledge-intensive companies).
Tax Relief: 30% income tax relief.
Size Restrictions: Gross assets under £30 million before investment and £35 million after investment; fewer than 250 employees (500 for knowledge-intensive companies).
Both schemes provide attractive tax benefits, but EIS is designed for businesses with a proven track record and significant growth potential. It’s an excellent option for companies looking to scale and attract larger investments while offering investors meaningful tax incentives.
Navigating these schemes can be complex, but you don’t have to do it alone. We make it easy for you to understand your eligibility, apply for the scheme and maximise your investment potential.
What Is Advance Assurance?
Securing SEIS/EIS Advance Assurance from HMRC can be a game-changer for businesses aiming to attract investment. While it’s not mandatory, this pre-approval reassures potential investors that your business is on track to qualify for Enterprise Investment Scheme (EIS) tax relief, giving them added confidence in their decision.
How to Secure EIS Advance Assurance
To apply for Advance Assurance, businesses need to provide HMRC with a detailed application, which should include:
- A comprehensive business plan/ pitch deck and financial projections.
- Clear details about your company’s activities, structure, and ownership.
- A breakdown of how the funds will be deployed.
- Letter(s) of Intent from potential investor(s)
Contact our team for expert advice and support with obtaining EIS Advance Assurance.
Common Mistakes to Avoid
Applying for EIS can be a complex process, and mistakes can delay approval or result in rejection. Here are some common pitfalls to avoid:
1. Not Meeting Eligibility Requirements
Ensure your company meets the EIS-specific criteria, including size, age, and trade activities.
2. Incomplete Documentation
Submit a complete application with accurate business plans, forecasts, and company details to prevent setbacks.
3. Improper Use of Funds
Clearly demonstrate that the funds will be used for qualifying business purposes, such as growth and innovation.
4. Overlooking Professional Advice
Partner with experienced advisors to guide you through the application process and enhance the likelihood of approval.
Final Thoughts
The Enterprise Investment Scheme is more than just tax relief. It’s a launchpad for innovation and growth. Understanding EIS eligibility and adhering to HMRC guidelines is crucial for unlocking the scheme’s potential.
At Rise Accounting, we’ve guided hundreds of early-stage businesses over the years and are committed to delivering unparalleled excellence. We make navigating EIS simple and strategic. Whether it’s eligibility, application preparation, or submission, our team is here to help you succeed.
