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A Short Guide to Enterprise Investment Scheme Relief

August 29, 2019 Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is a government incentive to encourage equity investment in new businesses.

If your business meets the EIS criteria it could significantly increase your appeal to investors as they would be granted Capital Gains and Income Tax reliefs on their investment.

If your business is less established than those eligible for the Enterprise Investment Scheme, you might instead be eligible for a similar plan: the Seed Enterprise Investment Scheme (SEIS).

What’s the difference between SEIS and EIS?

The key difference between the two schemes is the type of company that can raise money through each plan.

SEIS is targeted at early-stage businesses to attract seed funding, whereas EIS encourages investment in more established companies.  Many companies will ultimately progress from SEIS to EIS because they qualify to take part in EIS after raising money through SEIS.

There are different qualifying criteria for each scheme, and they offer different levels of tax relief.  SEIS investors receive income tax relief of 50% of the cost of the shares, whilst EIS investors receive income tax relief of 30%.

A Knowledge-Intensive Company explained

Investments made into knowledge-intensive companies benefit from increased EIS annual limits.  You can apply as a ‘knowledge-intensive company’ if at the time that you issue your shares your company is carrying out research, development or innovation.

Extra conditions include:

  • the amount of your overall operating costs spent on research and development or innovation must be at least either:
    – 10% in each of the 3 years before the investment
    – 15% in any one of those 3 years
  • the company must either:
    – be carrying out work to create intellectual property and you expect the majority of your company business will come from this within 10 years
    – have 20% of your employees carrying out research and development as well as having a relevant Master’s or higher degree

Do you qualify for EIS?

In order to raise money through an EIS, the company must be/have:

  • Planning to use the funds raised to continue trade, establish a new kind of trade, or continue with relevant research and development. The funds cannot be used to acquire another business
  • A ‘permanent establishment’ or fixed place of business in the UK – i.e. an office, factory or place of management
  • Made your first commercial sale less than 7 years ago, or 12 years if your trade meets the Knowledge Intensive Company rules
  • Gross assets under £15m immediately before shares are issued and under £16m immediately after shares are issued
  • Willing to use the funds raised from the issue of shares within two years
  • Fewer than 250 full-time equivalent (FTE) employees or fewer than 500 FTE for a knowledge-intensive company.
  • Unquoted
  • Independent – not controlled by another company, or have any arrangements to be controlled by another company when the shares are issued
  • Operating in a qualifying trade, preparing to trade and commence trade within two years, or conducting research and development

This list isn’t exhaustive and additional conditions may apply.

How does EIS work?

A business raises finance by issuing shares to investors, they can then claim tax reliefs based on the amount invested.  The Company is allowed to raise up to £5m a year (and a maximum of £12m over the Company’s lifetime).  A knowledge-intensive company is allowed to raise a maximum of £10m a year (and a maximum of £20m over the lifetime).

There is no minimum amount you must raise. These limits also include any money raised from any other ‘risk finance state aid’ schemes. State aid can take many different forms such as grants, tax breaks or loans, it is worth checking if any other funding you receive falls into this category.

EIS investors can make a maximum investment of £1m per tax year, or a maximum investment of £2m in knowledge-intensive companies (less any amounts invested through SEIS).  Investors may elect to carry back to the previous tax year subject to the applicable annual limit.

The EIS is administered by HMRC through the Small Company Enterprise Centre (SCEC), they will conduct their own checks to determine whether or not your company qualifies.

You aren’t obliged to prove that you qualify prior to issuing shares, but you can choose to submit information to them in an ‘advance assurance’ form about your plan to raise money, your business structure and activities.  HMRC will also expect a copy of your company’s business plan which has been provided to potential independent investors.

The SCECs will review these documents and confirm whether you will qualify. There is no obligation to go through this check but it gives investors more confidence.

When you have secured investment, investors must hold their shares for a minimum of three years from the date of the share issue, or the commencement of the company’s qualifying trade.  However, if you no longer qualify for EIS during this time, then your investor’s ability to claim relief would be affected.  You need to inform your SCEC within 60 days of the event which makes you ineligible.

How do your investors claim tax relief?

They have to fill out an EIS compliance statement (EIS1) and send it to your SCEC after you have received money from investors.  Once the SCEC is satisfied that all conditions have been met, they will issue an EIS2 form to certify this.  Then they’ll issue EIS3 forms for you to send to investors in order for them to claim the tax relief.

Qualifying trades

Only companies that conduct a qualifying trade are eligible for both EIS and SEIS. Most trades are acceptable, but there are some excluded activities or excluded trades.

You will not qualify for SEIS or EIS funding if any of your daily business activities (a maximum of 20% on an overall group basis) consists of the following activities, or if you provide services to businesses trading in the following activities:

  • Operating or managing hotels or residential care homes
  • Leasing
  • Legal and accounting services
  • Banking, insurance, hire purchase, lending, and other financial activities
  • Dealing in land, commodities, futures, securities or financial instruments
  • Coal production, steel production and shipbuilding
  • Property development
  • Dealing in goods other than normal retail or wholesale distribution
  • Forestry
  • Receipt of royalties or licence fees
  • Farming and market gardening
  • Solar or wind power generation from which feed-in tariffs, renewable obligation certificates (ROCs) and renewable heat incentives (RHIs) are derived (from 6 April 2015)
  • Providing services to a non-qualifying business under similar ownership

Pros and cons

Businesses need to be at a particular stage in their journey to take advantage of the schemes, and it is essential that you meet all relevant criteria to qualify.  This can place restrictions on how your business operates, expands and recruits whilst you raise money through SEIS or EIS.  It can also cause problems for your investor if you do not meet the qualifying criteria for the entire three years (or possibly longer) that they hold shares in your company as their income tax relief could be withdrawn/reduced.

Further regulations limiting how many shares you can issue to an individual investor, and what relationship you have with the investor also exist.  You might experience complications if the investor is related to you for example.  You might want to contact HMRC or your SCEC before issuing any shares to make sure you are within the guidelines, otherwise your investor may not be eligible for any tax relief.

Summary

Ultimately, establishing either SEIS or EIS can be complicated, and it pays dividends to have an expert on your side that has completed similar projects before as they will be able to advise you in advance if your business qualifies for either scheme.

 

The team at KJG has decades of experience advising businesses on SEIS, EIS and similar schemes. For a no obligation conversation contact our team on 0161 832 6221 or email info@kjgllp.com.