The Enterprise Investment Scheme is one of the Venture Capital Schemes designed to help young, high-risk trading companies raise funds by offering generous tax reliefs to investors who buy new shares in the company.
Investors can claim tax relief on up to £1 million worth of investments per year, and £2 million worth of investments per year if half of this is invested in knowledge-intensive companies. EIS-eligible investments can also be applied to the previous tax year.
Investment can be received under EIS only if it is within 7 years of your company’s first commercial scale.
Companies which partake in the scheme can raise up to £5 million each year, and £12 million in the company’s lifetime. This includes from other Venture Capital Trusts, Seed Enterprise Investment Schemes, Social Investment Tax Relief and state aid.
RELIEF
Income Tax Relief
You will be able to claim up to 30% of the value of your investment. For example, if you make an investment of £20,000, you will be able to save £6,000 in income tax.
Capital Gains Tax Relief (CGT)
There are 2 types of CGT reliefs claimable with the EIS scheme:
Disposal relief: if an investor sells their shares after 3 years, they will be exempt from CGT on investment gains.
Deferral relief: if an investor disposes of an asset and uses the gain to invest in shares in a company that qualifies for EIS, they will not have to pay CGT until the EIS share has been disposed of.
Loss Relief
If the company fails, the investor may claim loss relief. The amount of loss relief you can claim is equivalent to the rate of income tax you pay. For example. if you pay a rate of 45% of income tax, you will be able to claim up to 45% of your net loss in income tax relief.
WHO QUALIFIES AS AN INVESTOR?
- A qualifying investor can be any individual unless they are connected to the issuing company
- The investor must not hold any shares in the company at the time of issue of shares unless under EIS, SEIS or SITR
- An investor must have a UK tax liability
- An investor must not have any linked loans
- An investor is not connected with the qualifying company in the period starting 2 years before the issue of shares and finishing with 3 years after the issue of shares (or 3 years after commencement of trade, if this is later)
WHAT IS A CONNECTED INVESTOR?
- An employee of the company of an associate of the employee (e.g. spouses, parents or children, siblings of an investor do not count as being connected)
- If an investor is a director of the company, however a director would be unconnected if he is not paid in the period 2 years before the issue of shares and 3 years after the issue of shares, or if they are not connected with the company before the issue of shares and they then become a paid director after the issue of shares
- If the investor holds over 30% of the ordinary shares or can exercise more than 30% of the voting rights
WHAT TYPES OF SHARES QUALIFY?
- Shares that are issued to raise funds for a qualifying business activity that are used to grow and develop the company
- Shares issued must be full risk ordinary shares, paid in full, in cash, when issued, and must not be redeemable or carry no special rights to your assets
- There cannot be shares within the company of different rights, including voting rights
- There are different rules for bonus shares
THE MONEY RAISED MUST:
- Be used for research and development that is expected to lead to a qualifying trade, which must start within 2 years of the investment
- Not be used to buy part or all of another business
- Be spent within 2 years of the investment
- Be used to grow your business
The above are general conditions relating to the Enterprise Investment Scheme and each company should be reviewed on a case by case basis.
FURTHER INFORMATION
For further information, or to book a free consultation,
please contact Parminder Chattha
or Virali Patel
on 0207 309 2222.
Parminder Chattha
Parminder is a CTA qualified Corporate Tax Specialist with significant R&D Tax experience.
Virali Patel
Virali specialises in Research and Development tax relief, an area which she has been solely focusing on since 2016.
