Looking to raise finance to grow? Have you considered the enterprise investment scheme (EIS)?
The tax incentives available make EIS investments very attractive. Income tax relief for qualifying investors is immediate, and if an investment is successful, it may be disposed of tax free. These schemes are therefore very much worth considering if your company is looking to raise finance.
EIS has been designed to help smaller higher risk companies to raise finance. To qualify for the scheme, your company must, among other things:
1. Carry out a qualifying trade, or R&D which will lead to a qualifying trade
Most trades will qualify, however there are certain “excluded activities”, which include property development, farming, operating or managing hotels and energy generating activities (for example, solar farms) – these do not qualify.
2. Have a UK permanent establishment
The company must have a fixed place of business in the UK, for example a UK office or factory. If the company does not have a fixed place of business in the UK, it may qualify if it has an agent in the UK.
3. Be a “smaller” company
The company’s gross assets must not exceed £15 million before the share issue and £16 million after. The company must also have fewer than 250 full time employees (or 500 if a “knowledge intensive” company) at the time of the share issue.
4. Be a relatively young company, or plan to do something “different” with the money
EIS is primarily aimed at companies in their early years of operation, being within seven years of their first commercial sale. Accessing EIS as a more established company is not impossible, but you would need to demonstrate that you plan to do something different with the money, for example develop a new product, and that the investment is significant (at least 50% of the company’s average annual turnover for the last 5 years).
The money raised by the EIS share issue must be used within the qualifying trade or R&D within two years.
How much can you raise?
Your company can raise up to £5 million each year, and a maximum of £12 million in its lifetime from all venture capital schemes, including EIS. If your company is a knowledge intensive company, these limits are increased to £10 million each year, and £20 million in the company lifetime.
What makes an EIS investment attractive to investors?
Investors in EIS shares can benefit from a range of tax incentives, the most significant of which is a 30% income tax relief. Investors can subscribe for up to £2 million of EIS shares (provided anything in excess of £1 million is invested in knowledge intensive companies), obtaining a reduction in income tax of up to £600,000 – if they had a liability this large. This relief can be carried back to the previous tax year.
In addition, investors can defer capital gains tax (CGT) due in respect of another disposal, where the sale proceeds are reinvested in EIS shares.
Gains on the disposal of EIS shares held for at least three years are exempt from CGT, provided income tax relief has been claimed on the original investment. Losses are allowable subject to adjustment for the income tax relief received.
A quick word about Seed EIS (SEIS)
New companies may benefit from SEIS. SEIS is similar to EIS, but is only available to companies with gross assets of less than £200,000 before the shares are issued, and fewer than 25 full time employees. You can raise a maximum of £150,000 through SEIS.
SEIS investors can receive even more generous tax relief – they can receive income tax relief of 50% of the cost of the shares!
It is possible to progress from SEIS to EIS as your company grows – if you want to do this, SEIS must be used first.
How we can help
EIS and SEIS can make an investment in your company more attractive to the potential investor by providing them with various tax reliefs when they buy new shares in your company.
At Kreston Reeves, we can look at your individual company’s situation to check if you qualify for and help you to access these schemes. For further information please speak with your usual Kreston Reeves adviser or Seonad MacLeod here or on +44 (0)330 124 1399.
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