The Enterprise Investment Scheme (EIS) affords the sophisticated investor a series of beneficial tax breaks in relation to qualifying investments. As such it is an ideal way to attract seed and growth capital for ambitious companies who need additional finance, particularly where the traditional bank funding route is not an appropriate option. Investing in EIS is actively encouraged by the government to raise funds for smaller businesses.
The tax reliefs available to the investor in headline terms are:
- Income tax relief at 30%;
- Exemption from capital gains tax;
- Roll over of capital gains on other assets;
- Inheritance tax friendly investment;
- Loss relief available if the investment fails.
Qualification for EIS is, however, a complex matter and many of the rules relating to the investor, the investee company and the relationship between the two must be observed over a period of time as well as considered in detail at the outset. Our flow chart is designed to guide you towards the likelihood of company qualification under the scheme but due to the vast plethora of legislation, cannot cover all of the relevant points.
If, after completing the questions, EIS looks to be a possible option for a planned capital injection, please contact us to discuss the detail of your specific situation and we will be delighted to help.
lf another company holds more than 50% of the issuing company's shares it is controlled by that holding company.
However, the definition of control also includes a company having the power to procure that the affairs of the issuing company are conducted in accordance with the holder's wishes, e.g. by way of an investment agreement, shareholders' agreement, financing agreement, etc.
A qualifying trade for EIS purposes is not defined in the legislation, rather there is a list of non-qualifying trades:-
- Dealing in land, commodities or futures, or in shares, securities or other financial instruments;
- Dealing in goods other than in the course of an ordinary trade of wholesale or retail distribution;
- Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
- Leasing (including letting ships on charter or other assets on hire);
- Receiving royalties or licence fees, however, exceptions are made for intangible assets created by the issuing company or its subsidiaries;
- Providing legal or accountancy services;
- Farming and market gardening, woodlands and timber production;
- Property development;
- Operating and managing hotels and nursing homes;
- Coal production;
- Steel production;
- Providing services to a connected person conducting one of the above trades;
- The subsidised generation of electricity, heat, gas or fuel.
There is no definition of growth and development. HMRC's view is that the factors should be reviewed at the time of the share issue, General indications of growth ambition would include plans for increasing revenues, customer base and employees.
For growth and development HMRC has produced a non-exhaustive list of the factors that may be considered relevant; these include whether or not the company has substantial assets; and what proportion of its trade is subcontracted.
In order to evidence recently created intellectual property the company should either:
- Produce patents or licences; or
- Have an independent expert, e.g. a university professor in a relevant field verify it is producing intellectual property.