Can a lender qualify for EIS relief?

  • Posted

Gannons advised on whether an individual who had previously made a loan to an EIS company could also qualify for EIS relief on his investment.

We established that if two conditions were met the lender could also be an EIS investor. Our advice as to the conditions the lender investor needed to satisfy were:

Condition 1

The loan must have been repaid before the EIS investment is made. The company will need to show in the EIS Advance Assurance application that the repayment of this loan is part of an overall programme of growth and development.

Condition 2

The loan will need to be repaid before and separately from the issue of further shares. This means that the loan cannot be converted into shares.

The repayment of the loan cannot be in pursuance of any arrangements for or in connection with the acquisition of shares.

The EIS corporate structure

Our client was a trading company providing branding and recruitment services. It was incorporated in January 2013. The EIS shares would be issued within seven years of the first commercial sale of the business.

The trade was expected to be a qualifying trade for EIS purposes.

Funds for EIS shares

In order to claim EIS relief there must be a subscription of new funds.

Can the loan be converted to shares?

The individual was making a loan of £100,000 to the company. If the loan was converted into ordinary shares, this would constitute a return of value and would not qualify for EIS relief.

Is a later investment connected to the original loan?

Provided that the EIS Advance Assurance has confirmed that the repayment of the loan to the individual is for the company’s organic growth and development, an investment by the individual several months later would not be connected to the original loan.

Use of EIS funds to repay the loan

There is an explicit requirement that any money raised from EIS investments must be for the company’s organic growth and development.

What are the generic indicators of growth?

Generic indicators of growth would include results such as:

Revenue

If a company can prove an increase in revenue over time it can show growth.

Customers

A company can indicate growth by showing an increase of its customer base.

Employees

A further indicator of growth is increase in the number of employees.

What must the money raised be used for?

The money raised should not be used to cover existing debts. However, there may be some cases where, for pre-revenue companies, a small proportion of funding is required to cover pre-existing costs as part of an overall programme of growth and development.

Proposed use of EIS funds should be set out in the business plan. Companies will be assessed on a case by case basis.

What should be stated in a business plan?

EIS companies should state clearly in their business plan how the growth and development requirement is expected to be met.

EIS companies should set out explicitly how many new employees they will take on, what new products they will develop, and/or how the investment will allow the company to reach new customers.

The level of detail in a business plan will depend on the size of the company and the amount of investment that is being sought.

Each case will be decided on its own specific circumstances.

  • Gannons explained the law in simple terms and applied it to our situation so that it was easy to understand.