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HMRC internal manual

Venture Capital Schemes Manual

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 are subject to an investment limit which operates on a rolling basis.

The limit takes into account ‘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.

The annual investment limit for most companies is £5 million, taken over a rolling 12 month period ending with the date that the risk finance investment is made.

The annual investment limit for a knowledge-intensive company is £10 million in any rolling 12 month period for investments made on or after 6 April 2018 (see VCM8162).

‘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 an SEIS compliance statement SEIS1
  • an investment made in a social enterprise (shares or loan) in respect of which the social enterprise provides an SITR compliance statement
  • any other investment which is a State aid approved by the European Commission in accordance with the Community Guidelines on Risk Finance Investments in Small and Medium-sized Enterprises (as replaced or amended).

Risk finance State aids other than EIS, SEIS, SITR or VCT investments

The UK Government does not maintain a list of other risk finance State aids.

A list of more recent UK risk finance State aids can be found at VCM8121.

However, there are a number of others both in the UK and in the European Union. It is the responsibility of the company to maintain a record of the aid it receives. A company which has received any funding either directly from a government or local government source, or other public agency 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 Risk Finance Guidelines mentioned above.

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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.

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Example 1

1 September 2018 Company (not a knowledge-intensive company) issues shares for £2 million
   
1 October 2018 Company submits an EIS compliance statement (form EIS1) covering all of those shares to the Venture Capital Relief Team (VCR Team). VCR Team accepts it and provides the company with certificates (forms EIS3) for the investors to claim relief
1 February 2019 Company issues a further £3.5 million of shares
1 March 2019 Company submits an EIS1 covering all of those further shares

Because the EIS1 relating to the second share issue covers shares that breach the £5 million limit, the VCR Team 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 £5 million limit was only breached to the extent of £500,000.

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 £1 million of the £2 million invested in the first issue on 1 September 2018. That makes no difference; it is still the figure of £2 million that counts towards the £5 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.

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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 2018 Company issues shares for £2 million
   
1 February 2018 Company issues another £3.5 million of shares
1 March 2019 Company submits an EIS1 covering all the shares issued on 1 February. The VCR Team issues forms EIS3 in respect of those shares, allowing investors to claim relief.
1 October 2019 Company submits an EIS1 covering all the shares issued for £2 million 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 £2 million of shares covered by this later statement must now be taken into account in determining whether relief was due on the £3.5 million of shares issued on 1 February 2019. 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 £2 million of shares since at the time those shares were issued the £5 million limit was not breached.

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Example 3

Where the 12-month period straddles 6 April 2018 the £10 million limit applies to a knowledge-intensive company, not withstanding that the company may have reached the £5 million limit before 6 April 2018.

1 August 2017 Company issues shares for £500,000
   
1 November 2017 Company receives VCT investment of £4.5 million
1 December 2017 Company submits EIS1 for the share issue on 1 August. VCR Team accepts it and provides forms EIS3.
1 June 2018 Company issues shares for £3 million

The £10 million limit applies to the share issue on 1 June 2018, so relief will be available for the whole of the share issue in June, 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, SEIS1 or SITR1 has been provided, whether or not relief has been allowed in respect of that share (or loan) issue. So if the company in Example 1 above wanted to issue further shares in January 2020 it would be limited to raising £1.5 million if the investors were to be eligible for relief, notwithstanding that no relief had been granted on the £3.5 million shares issued in February 2019.