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HMRC internal manual

Venture Capital Schemes Manual

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EIS: income tax relief: general requirements: maximum amount raised annually through risk capital schemes requirement

ITA07/S173A

Annual investment limit and ‘relevant investments’

Companies issuing shares on or after 19 July 2007 are subject to an investment limit which operates on a rolling basis. This limit does not apply in respect of shares issued to the managers of an Approved EIS Investment Fund which closed before 19 July 2007.

In respect of any issue of shares to which the limit applies, the legislation looks at ‘relevant investments’ made in the company during the 12-month period ending with the date those shares are issued. Should the limit be exceeded in the 12-month period, no relief will be available on the whole of the investment which breaches the limit.

Share issues on or after 19 July 2007 and before 6 April 2012

For shares issued during that period, the annual investment limit is £2m. For that period, ‘relevant investments’ include:

  • an investment of any kind made by a VCT,
  • an issue of shares in respect of which the company provides an EIS compliance statement (EIS1),
  • an issue of shares in respect of which the company provides a CVS compliance statement (CVS1).

Share issues on or after 6 April 2012

From that date, the annual investment limit is £5m. ‘Relevant investments’ now include:

  • an investment of any kind made by a VCT,
  • an issue of shares in respect of which the company provides an EIS compliance statement (EIS1),
  • an issue of shares in respect of which the company provides an SEIS compliance statement (SEIS1),
  • any other investment which is a State aid approved by the European Commission in accordance with the Community Guidelines on Risk Capital Investments in Small and Medium-sized Enterprises (as replaced or amended).

Risk capital State aids other than EIS, SEIS or VCT investments

The UK Government does not maintain a list of other Risk Capital State aids. The most commonly encountered UK Risk Capital State aids are likely to include Enterprise Capital Funds and certain regional funds including JEREMIE and JESSICA funds. However, there are a number of others both in the UK and in the European Community. A company which has received any risk capital funding either directly from a Government source or otherwise involving some degree of Government support or intervention, should check with the administrator of the fund or the support whether it is considered to be State aid covered by the Community Guidelines mentioned above.

Implications for completing form EIS1

To the extent that a share issue includes shares on which relief is to be claimed under EIS, it is only those shares that are included on EIS compliance statements (form EIS1) that contribute towards the limit.

So while all shares included on forms EIS1 count as relevant investments, not all shares within an issue (or subscription) should necessarily be included on those forms - only those shares in respect of which the investor has requested that the company issue a compliance certificate (form EIS3).

In order not to unnecessarily restrict their ability to raise funds, companies should ensure that only those investors who have indicated that they want an EIS3 so that they can claim relief are entered on the compliance statement. There is no statutory provision to amend an EIS1 once submitted but where an EIS1 contains factual errors then corrections can be made within the time limit for the original submission.

Example 1

1 September 2011 Company issues shares for £600,000
   
1 October 2011 Company submits an EIS compliance statement (form EIS1) covering all of those shares to the Small Companies Enterprise Centre (SCEC). The SCEC accepts it and provides the company with certificates (forms EIS3) for the investors to claim relief
1 February 2012 Company issues a further £1.5 million of shares
1 March 2012 Company submits an EIS1 covering all of those further shares

Because the EIS1 relating to the second share issue covers shares that breach the £2 million limit applying at the time, the SCEC will not issue forms EIS3 and the investors in that issue will be unable to claim tax relief. Note that no relief is available in respect of any of the shares in that issue, even though the £2 million limit was only breached to the extent of £100,000.

It is also important to note that it is the amounts entered on the compliance statement that count, irrespective of whether relief is actually claimed on all those amounts. It may be that, for various reasons, investors find they were unable to claim relief on more than £100,000 of the £600,000 invested in the first issue on 1 September 2011. That makes no difference; it is still the figure of £600,000 that counts towards the £2 million limit.

This limit operates by reference to the dates on which relevant investments in the company have been made, not by reference to the dates on which compliance statements are submitted. If compliance statements are not made in the same sequence as the share issues to which they relate the submission of compliance statement for an earlier issue may impact on the availability of relief on shares which have already been included on a compliance statement which relates to a later issue. The following example illustrates this.

Example 2

The facts are the same as in Example 1 above, except that, for some reason, the company does not submit the compliance statements in the order in which the shares were issued.

1 September 2011 Company issues shares for £600,000
   
1 February 2012 Company issues another £1.5 million of shares
1 March 2012 Company submits an EIS1 covering all the shares issued on 1.February. The SCEC issues forms EIS3 in respect of those shares, allowing investors to claim relief.
1 October 2012 Company submits an EIS1 covering all the shares issued for £600,000 on 1 September the previous year.

The latter compliance statement relates to the share issue that pre-dates (by 5 months) the issue reported on the statement received in March. The £600,000 of shares covered by this later statement must now be taken into account in determining whether relief was due on the £1.5 million of shares issued on 1 February 2012. Doing so means that no relief is due to any investors in the second issue, and any relief that has been given on those shares will be withdrawn. Relief may however be due on the £600,000 of shares since at the time those shares were issued the £2 million limit was not breached.

Example 3

Where the 12-month period straddles 6 April 2012 the £5m limit applies, notwithstanding that the company may previously have reached the £2m limit.

1 June 2011 Company issues shares for £500,000
   
1 September 2011 Company receives VCT investment of £1.5m
1 December 2011 Company submits EIS1 for the share issue on 1 June. SCEC accepts it and provides forms EIS3.
1 May 2012 Company issues shares for £3m

The £5m limit applies to the share issue on 1 May 2012, so relief will be available for the whole of the share issue in May, once the company submits its EIS1.

The limit in a 12-month period is calculated taking into account any investment in respect of which an EIS1 or SEIS1 has been provided, whether or not relief has been allowed in respect of that share issue. So if the company in Example 1 above wanted to issue further shares in January 2013 it would be limited to raising £3.5m if the investors were to be eligible for relief, notwithstanding that no relief had been granted on the £1.5m shares issued in February 2012.