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
- EIS benefits
- EIS qualifying conditions
- Factors which will deny EIS relief
Obtaining EIS advance assurance
Latest government statistics relating to the Enterprise Investment Scheme (“EIS”) show:
- 24,620 companies received investment via EIS raising £12.2 billion of funds;
- 25% increase in the number of companies which raised funds in 2014-15 as compared with 2013-14;
- The majority of investment through EIS was investment into companies 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 is 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.
EIS starter pack
We offer EIS services in a flexible way tailored to your requirements:
- Fixed fee service for production of the EIS advance assurance application (£950 plus VAT) and bespoke articles and shareholders’ agreement (£2,200 plus VAT); or
- No win no fee basis under which you pay our fees once we have obtained EIS advance assurance and you have raised the initial funds (£4,500 plus VAT).
The reliefs available to EIS investors include:
- Income tax relief: of 30%, up to a yearly investment amount of £1 million;
- CGT exemption;
- 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?
- 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;
- 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;
- 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 £15m directly prior to the allotment of the shares and £16m 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 £5m 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;
- A skilled employees condition.
Factors which will deny EIS relief
The following factors will deny EIS relief:
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.
In effect, investors must now seek EIS relief in a company from the start.
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; and
- 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 but there are special rules if it is intended to use EIS funds to repay a loan.