The EIS regime de-risks investment by offering investors generous tax reliefs. Although tax-rates are rising, the Government appears keen to continue to promote EIS. There are many success stories. We help you attract investors by securing EIS approval for your business to pass onto investors.
Helping you secure EIS status for investors
Obtaining EIS advance assurance
Latest government statistics relating to the Enterprise Investment Scheme (“EIS”) show:
- Since its launch, over 26,000 companies have received investment via EIS raising over £15.9 billion of funds;
- Almost 50% of the investment through EIS is investment into companies raising funds for the first time;
- Most companies receiving EIS investment are in the high-tech and business services sectors.
Warning about EIS
HMRC do not accept error excuses. This means if you do not file the right information on the right form the company will not qualify for EIS. HMRC are unconcerned that none of your investors will benefit for EIS tax relief if you filed incorrectly.
Avoiding problems with EIS
We provide a one stop service for businesses that can include:
- Review of eligibility for EIS;
- EIS advance assurance from HMRC;
- Draft or review of articles and shareholders’ agreement; and
- Holding of funds on client account pending closing of the investment round.
Enterprise Investment Scheme starter package
We offer starter packages for the EIS advance assurance process starting from £950 plus VAT if no articles or shareholders agreement are required; or £2,200 plus VAT for companies that do require bespoke articles or a shareholders agreement.
The reliefs available to EIS investors include:
- Income tax relief: of 30%, up to a yearly investment amount of £1 million;
- CGT exemption; and
- Deferral of CGT when certain assets are sold and the funds reinvested in EIS shares.
Protection for EIS investors
There are hidden risks for EIS investors which we can uncover. For example:
EIS shareholder rights
Shareholder rights: especially a focus on anti-dilution provisions within the EIS parameters. We review the corporate documentation – mainly the shareholders agreement and articles of association.
Eligibility to obtain tax relief on the EIS investment
We look at the ability of an investor to obtain EIS relief. The tax residence of the investor may need a review. Also, the investor will suffer if the trade does not qualify under the EIS legislation as “trading”.
EIS qualifying conditions
To determine whether EIS is available there are three areas to consider:
- Will the funds be used for a qualifying purpose?;
- Is the company that offers EIS relief a qualifying company?; and
- Is the investor a qualifying investor?
Using the funds for a qualifying EIS purpose
There are two issues:
- The application for shares must not constitute tax avoidance and must be for true commercial purposes; and
- The funds raised must be used for a qualifying trade e.g. property development and activities of a financial nature are excluded.
Qualifying EIS investor
The shareholders must meet the following requirements:
- The shareholder cannot hold more than 30% of the company’s shares, either on his own or with associates;
- The shareholder cannot have been an employee or remunerated director of the company prior to acquiring the shares. However, the investor may become a paid director after becoming a shareholder.
- The shares should be held for over 3 years; and
- The shares cannot have any preferential rights (even if insignificant) to the company’s assets on winding up.
Qualifying EIS companies
There are requirements around the company’s size and status:
- The company’s gross assets must not be more than £15 million directly prior to the allotment of the shares and £16 million directly after such allotment;
- The company cannot be a quoted company at the time the shares are allotted;
- The company cannot be a subsidiary of another company (where that other company holds more than 50% of the shares in the company);
- The company must have fewer than 250 employees;
- The company cannot raise more than £5 million in total over a 1 year period under EIS; and
- The funds raised must be used for the qualifying trade.
£20 million: knowledge intensive companies lifetime EIS investment limit
A company has always been able to raise up to a £15 million lifetime limit, via any combination of SEIS, SEIS or VCT. For knowledge-intensive companies, this rises to £20 million, and the employee limit from 250 to 500 employees, if the company meets:
- R&D spending requirements;
- An innovation condition; and
- A skilled employees condition.
Factors which will deny EIS relief
In effect, investors must now seek EIS relief in a company from the start. It is difficult to obtain EIS relief when making an additional investment in a company where the investor already holds shares.
Restrictions on the proposed EIS investor
Any EIS investor’s shareholding has always been restricted to 30% of the company’s total issued share capital. Now an investor only gets EIS relief for additional investment if:
- The other shares the investor holds are part of an issue of shares in respect of which the company has submitted an EIS or SEIS compliance statement; or
- Where those shares are subscriber shares.
Company must be under 7 years old
Investors can no longer invest in a company that has been trading for more than 7 years. Clearly this change restricts investment opportunities for older companies. There are a couple of exceptions: e.g. if the investment
- Will lead to a substantial change in the company’s activity; or
- In total, represents more than 50 per cent of turnover averaged over the preceding five years.
Intention to grow and benefit a business
Qualifying for EIS relief includes a requirement of an “intention to grow and benefit a business”. It is not known how HMRC will deploy this weapon.
EIS recent experience
We have helped businesses and investors from a wide range of sectors. An example of our work includes:
We worked with an app developer seeking EIS investment to enable it to become one of the leading providers of download games from the app stores. EIS status for the business was obtained despite the licence fee income. The business raised £5 million via EIS.
We worked with a technology company seeking both UK and US investors. We structured a deal to offer the EIS investment to the UK investors only.
We reviewed a situation where an EIS compliance statement was rejected for inclusion of a put-option.
Further investment rounds
We worked with a restaurant looking to raise further investment via the EIS scheme.