In many countries, governments offer tax incentives to encourage investment in business, aiming to promote national economic growth. The UK has several tax incentives, but the most common for entrepreneurs is the Enterprise Investment Scheme (EIS).
How does it work?
The Enterprise Investment Scheme (EIS) is one of the many options for your company to raise money and help grow your business. The scheme offers tax reliefs (UK 2018/19: 30%) to individual investors who buy new shares in your company. To be eligible to apply for the scheme, your company must receive the investment within 7 years of its first commercial sale.
Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This includes amounts received from other venture capital schemes such as Venture Capital Trusts (VCT), the Seed Enterprise Investment Scheme (SEIS), and social investment tax relief (SITR).
In order for your investors to be able to claim and keep EIS tax reliefs relating to their shares, you must follow the scheme rules. If you fail to follow the rules for at least 3 years after you receive the investment, HMRC will most likely withhold or withdraw any tax relief claims from your investors.
What can you use this money for?
The investment’s purpose is to fund a qualifying business activity such as a qualifying trade or preparing to carry out a qualifying trade within 2 years of the investment. It is also possible to use the investment for research and development with the intention of a qualifying trade.
You must spend the money you raised within two years of the initial investment, or if later, the date you started trading. You cannot use the money to buy all or part of another business, but you should use it to develop and grow your existing business. See our guide for other ways to raise money for your business.
Companies that can use the scheme
For any company to be able to apply for the scheme it must have a permanent establishment in the UK. Furthermore, the company should not trade on any recognised stock exchange, or plan to do so in the future. Your company should not control another company, other than qualifying subsidiaries and it should not be controlled by another company.
All companies applying for the scheme, as well as their qualifying subsidiaries must not have gross assets worth more than £15 million before any shares are issued, and no more than £16 million immediately afterwards. Also, to be eligible, your company must have less than 250 full-time employees at the time the shares are issued and it must carry out a qualifying trade. If you’re part of a group, the majority of the group’s activities must be qualifying trades.
Do all trades qualify for the Enterprise Investment Scheme (EIS)?
Most trades qualify for EIS funding. However, the following trades are specifically excluded:
- Coal or steel production
- Farming or market gardening
- Leasing activities
- Legal or financial services
- Property development
- Running a hotel
- Running a nursing home
- Power generation
Before raising your money
Your investors will only be able to claim tax relief if you meet the conditions for the scheme. These conditions are set in place to ensure the investment is genuine rather than some form of tax avoidance. The ability to find appropriate investors for any particular project has evolved, as a result of technological advancements and the internet. Today, a number of crowdfunding platforms such as Crowdcube link businesses to investors.
You can ask HMRC if your share issue is likely to qualify before you go ahead. This is called advance assurance.
How to apply
To find out more about the scheme and how to apply, visit www.gov.uk
If you have any questions about Enterprise Investment Scheme (EIS), or to find out how Pentins can assist you to obtain more funding and achieve fast growth, talk to one of our expert advisers.