You may be able to attract investment up to £5 million a year with tax relief for individual investors if your company has less than £15 million of assets.
The Enterprise Investment Scheme (EIS) is one of 4 venture capital schemes - check which is appropriate for you.
How the scheme works
EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.
Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of the first commercial sale.
You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you don’t follow the rules for at least 3 years after the investment is made.
There are different rules for knowledge-intensive companies that carry out a significant amount of research, development and innovation, and either:
- want to raise more than £12 million in the company’s lifetime
- didn’t receive investment under a venture capital scheme within 7 years of the first commercial sale
What money raised can be used for
The money raised by the new share issue must be used for a qualifying business activity, which is:
- a qualifying trade
- preparing to carry out a qualifying trade (which must start within 2 years of the investment)
- research and development that’s expected to lead to a qualifying trade
The money raised by the new share issue must:
- be spent within 2 years of the investment, or if later, the date you started trading
- be used to grow or develop your business
- not be used to buy all or part of another business
Companies that can use the scheme
Your company can use the scheme if it:
- is established in the UK
- isn’t trading on a recognised stock exchange at the time of the share issue and doesn’t plan to do so (also known as an unquoted company)
- doesn’t control another company other than qualifying subsidiaries
- isn’t controlled by another company or doesn’t have more than 50% of its shares owned by another company
Your company, and any qualifying subsidiaries must:
- not have gross assets worth more than £15 million before any shares are issued and not more than £16 million immediately afterwards
- have fewer than 250 full-time equivalent employees at the time the shares are issued
Your company must carry out a qualifying trade. If you’re part of a group, the substantial majority of the group’s activities must be qualifying.
Limits on money raised
Your company can’t raise more than £5 million in total in any 12-month period from:
- Venture Capital Trusts (VCT)
- the Seed Enterprise Investment Scheme (SEIS)
- social investment tax relief (SITR)
- state aid approved under the risk finance guidelines - check with the person who gave you the aid for advice if this applies
Your company can’t raise more than £12 million from these sources in your company’s lifetime. This includes any money received by any subsidiaries (or former subsidiaries) or businesses you’ve acquired.
Limits on the age of the company
You can receive investment under EIS as long as it’s within 7 years of your company’s first commercial sale. If you have any subsidiaries (or former subsidiaries) or businesses you’ve acquired - the date of the first commercial sale is the earliest for the group.
If you received investment in this period (under EIS, SEIS, SITR, VCT or state aid approved under the risk finance guidelines), you can use EIS to raise money for the same activity as long as you showed you were planning to do so in your original business plan.
If you didn’t receive investment within the first 7 years, or now want to raise money for a different activity from a previous investment, you’ll have to show:
- the money is required to enter a completely new product market or a new geographic market
- the money you’re seeking is at least 50% of the company’s average annual turnover for the last 5 years
Qualifying subsidiary companies
If your company owns or controls any other companies they need to be ‘qualifying subsidiaries’. This means:
- your company must own more than 50% of the subsidiary’s shares
- no one other than your company or one of its other qualifying subsidiaries can control this subsidiary
- there can’t be any arrangements which would put someone else in control of this subsidiary
The subsidiary must be at least 90% owned by your company where either the:
- business activity you’re going to spend the EIS investment on is to be carried out by the qualifying subsidiary
- subsidiary’s business is mainly property or land management
When you issue shares
The shares you issue must be paid up in full, in cash, when they’re issued. Your company should have a way to accept payment before shares are issued.
Your shares for EIS investments must be full risk ordinary shares which:
- aren’t redeemable
- carry no special rights to your assets
The shares you issue can have limited preferential rights to dividends. However, the rights to receive dividends can’t be allowed to accumulate or allow the dividend to be varied.
When you issue the shares there can’t be an arrangement:
- to guarantee the investment or protect the investor from risk
- to sell the shares at end of, or during the investment period
- to structure your activities to let an investor benefit in a way that’s not intended by the scheme
- for a reciprocal agreement where you invest back in an investor’s company to also gain tax relief
- to raise money for the purpose of tax avoidance - the investment must be for a genuine commercial reason
Before raising your money
Your investors will only be able to claim tax relief if you meet the conditions for EIS.
You can ask HM Revenue and Customs (HMRC) if your share issue is likely to qualify before you go ahead, this is called advance assurance.
How to apply
When you’ve issued your shares, whether or not you asked for advance assurance, you must complete a compliance statement (EIS1) and provide your:
- business plan
- memorandum and articles of association
- last annual accounts and cash flow forecast (if you haven’t submitted accounts yet just provide your cash flow forecast)
- shareholder agreements or drafts (if you have them)
- prospectuses and other documents for attracting investment (if you have them)
You can only submit your compliance statement when you’ve carried out your qualifying business activity for 4 months. You must submit it within 2 years of this date, or within 2 years of the end of the tax year in which the shares were issued (whichever is later).
You must complete a separate application for each share issue.
What happens next
If your application is successful, HMRC will confirm the decision and send you compliance certificates (form EIS3) to give to your investors. Your investors can’t claim the tax relief until they receive their compliance certificate from you.
You must follow the scheme rules for at least 3 years after the investment is made - otherwise tax relief will be withdrawn from your investors. You must tell HMRC if you no longer meet the conditions within 60 days.
Small Company Enterprise Centre (Admin team)
Insight, Understanding and Risk SO970
Wealthy and Mid-sized Business Compliance
Where HMRC decides the investments don’t meet EIS requirements, we’ll write to you explaining why. If you disagree, you can ask HMRC to review their decision, or appeal against it.