It is a win-win situation for the Company and the Investor!
The Enterprise Investment Scheme (EIS) has been made available by the government to help small to medium sized companies grow by acquiring investments. It is one of four schemes available and it provides tax relief for investors who purchase shares. Therefore, it acts as an incentive for individuals to invest into small to medium sized companies and in turn assisting the government’s goal of growth. It is a win-win situation for both parties.
If you are a company looking for investment through EIS you can raise up to £5 million per year and £12 million maximum in the company’s lifetime. There are certain legal requirements that the company must meet and these are outlined in the Income Tax Act 2007. Additionally, under the new rules the company must show evidence of long term growth and outline the high risk of potential capital loss. Overall, it is vital that the company and investors complies with the scheme’s rules for 3 years in order for the investors to receive and keep the tax relief. It is important to note that it is not solely a commitment at the point of investment but must be adhered by for 3 years.
HMRC enables companies to apply for Advanced Assurance before shares are issued. This can aid the company to receive investment as it provides investors with assurance whether the company will be eligible for EIS. Please note that HMRC no longer provide advanced assurance on applications entailing speculative investors. Therefore, potential investors must be detailed in the application and the process cannot be commenced without the company having an idea of whom their investors will be.
We at CooperFaure can assist in compiling all of the following which is required for an Advanced Assurance Application:
- Copy of latest Company Annual Accounts and for any subsidiary of the company
- Business Plan & Forecasts
- Future Trading Activities
- A comprehensive list of tax-advantaged investments already received
- Full details of the amount the company is looking to raise
- Memorandum and Articles of Association
- Register of Members
- Full information of any subscription agreements
- Confirmation that the company is expecting to be able to successfully complete the application form showing that they are a qualifying company
- Details of potential investors
- Information Memorandum
If the company is not going to apply for Advanced Assurance the full list stated above is required to be submitted alongside the Compliance Statement (EIS1 form). Once it has been reviewed by HMRC’s Small Companies Enterprise Centre (SCEC) it will either be refused or approved. If the Compliance Statement is approved SCEC will send the company two forms EIS2 and EIS3. EIS2 states that the company is authorised to issue certificates that they are a qualifying company. EIS3 are blank forms that the company is required to fill in and send to the individual investors as a certificate. These certificates enable the investors to receive tax relief. Without proof of EIS3 the investor will not be able to claim tax relief.
A company must not submit the Compliance Statement until at least 4 months of the specific trade or research and development has been carried out for which the money is raised. Additionally, it has to be submitted before 2 years has passed from the end of the specific tax year that the shares were issued or two years after the end of the period of four months referred to above.
In order for the investor to make a claim they need to have an EIS3 certificate as stated above, ensure that they meet all of the conditions and that the claim is made within 5 years after the 31 January following the tax year in which the shares were issued.
The investor cannot have any connection with the company in order to qualify for tax relief. The following are examples of people who will not qualify due to this reason:
- Employee of the company
- Director of the company (some exceptions apply) – if they are unpaid, pay is reasonable, not connected when the investment occurred or they satisfy the business angels exception.
- Hold more than 30% of:
- ordinary shares
- issued share capital
- voting power
- rights of assets if company goes into liquidation
All of the conditions above apply for 5 years and this period is for 2 years before and 3 years after the latest of date the shares were issued or date of start of trade.
Additionally, as well as the examples provided above the 30% rules apply for an associate and therefore will not qualify as an investor. An associate can be anyone of the following:
- Civil Partners
- Business Partners
- Trustees of any settlement in which the person is a beneficiary or settlor
For shares distributed at incorporation and before trade has commenced or more shares are issued the 30% rule does not apply.
Siblings are not seen as associates of the company and can therefore qualify as an investor as long as all the other conditions mentioned above are met.
If the investor receives any value for example in terms of a loan or shares are repurchased during the 5-year period the relief received from EIS must be withdrawn or reduced.
For further details how to take your business to the next level please read our previous newsletter.
We at CooperFaure believe that EIS is a great scheme for most companies to attract investors in order to grow their company. We have assisted numerous clients with the EIS process and have found that as long as all the information is correctly provided to SCEC and all conditions are met there is no reason for the company not to be eligible for EIS.
If you would like to arrange an initial consultation that is free and without obligation to discuss your circumstances, please email us at firstname.lastname@example.org.