Enterprise Investment Scheme (EIS)

Posted by on Sep 23, 2018 in News Alerts, Newsletters | No Comments

Within this newsletter we inform you on what an Enterprise Investment Scheme is, who they affect and whether you are eligible to utilise them.

 

EIS provides the investors with a tax relief on their investment and has been made available by the government to aid growth. The investors receive a tax relief for the amount invested and in turn acts as an incentive, easing the process to attract investors. It is one of four schemes available under the venture capital schemes.

The following applies under EIS:

  • You can raise up to £5 million per year
  • You can raise a maximum up to £12 million for the company’s life time as a total from all venture capital schemes
  • For a knowledge-intensive company, you may be able to attract up to £20 million of investment in the lifetime of your company with EIS
  • The investment must be received within 7 years from the first sale
  • No growth asset exceeding £15 million before shares are issued and not exceeding £16 million instantly after the share issue
  • Have less than 250 full time employees

 

There are certain rules that you must follow to ensure your investors receive their tax relief. These rules must also be followed for at least 3 years after the investment has been received.

The money received from the investor is limited to be spent on qualifying business activities:

  • A qualifying trade
  • Preparing to carry out a qualifying trade within 2 years of the investment
  • R&D expected to lead to qualifying trade

If more than 20% of you trade includes any of the following it does not qualify:

  • coal or steel production
  • farming or market gardening
  • leasing activities
  • legal, accounting or financial services
  • property development
  • running a hotel
  • running a nursing home
  • generation of energy, such as electricity and heat
  • production of gas or other fuel
  • banking, insurance, debt or financing services

 

The money raised through EIS must be used within 2 years of the investment or if trade has not commenced it is on the start date of trading. The key is to use the money to grow your business, it cannot simply be used to purchase another business. Therefore, growth can be for example an increase in revenue, client base or the number of staff. This is part of the risk to capital condition that was introduced this summer. This condition also includes that the investment should be a risk to the investor’s capital and therefore within the agreement between the company and the investor there cannot be arrangements in place to reduce the risk. If the investment is in any way protected, for example by assured future income streams or capital repayment, the investment is unlikely to meet the risk condition. For more information regarding the risk to capital condition please click here (http://cooperfaure.co.uk/risk-to-capital-condition/).

Additionally, in order to qualify for the scheme your business must be permanently established in the UK without being on the stock market. Additionally, the company cannot be controlled or control another company.

To apply for EIS a compliance statement (EIS1) along with the following documents must be submitted, per share issue once a minimum of 4 months qualifying business activities has occurred:

  • business plan
  • memorandum and articles of association
  • last annual accounts and cash flow forecast
  • shareholder agreements or drafts
  • prospectuses and other documents for attracting investment

If successful you will receive the authority to issue certificate (EIS2) and compliance certificate (EIS3) from HMRC. The EIS3 certificate must be passed on to the investor as without it they will not receive their tax relief.

In the past we would have strongly recommended to apply for Advanced Assurance as it provides you with a confirmation if you will be eligible for EIS before submitting EIS1. However, the HMRC has recently amended the requirements and you are no longer allowed to provide speculative plans within the Advanced Assurance application (EIS(AA)). Therefore, you must have particular investors in mind before submitting the EIS(AA). This has removed the ability to use the Advanced Assurances as a mechanism to attract investors by showing that you will be eligible. Nevertheless, if the investor is reluctant to commit we would still recommend to use EIS(AA) but you should bear in mind that this will prolong the process.

For further information please visit the HMRC’s website: https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme

 

At CooperFaure, we have vast experience of helping businesses to secure investments and, in particular, benefit from government schemes. If you have any questions regarding Venture Capital Schemes, please email us at tax@cooperfaure.co.uk.