Investing in the Enterprise Investment Scheme

Enterprise Investment Scheme (EIS) is a government initiative designed to encourage individuals to invest into unlisted companies who are in their early stages.

How does the Enterprise Investment Scheme (EIS) work?

As a Company

As a company, it is designed to enable you to obtain investment so you can grow your business. This is achieved through offering tax reliefs to investors who buy new shares in your company.

Your company may raise up to a maximum of £5 million each year of which you have up to two years to use this on a qualifying trade.

Most trades will qualify as a qualifying trade. Trades qualifying and not qualifying can be found on HMRC’s website at //www.gov.uk/guidance/venture-capital-schemes-raise-money-by-offering-tax-reliefs-to-investors#trades.

To qualify for the scheme your company must:

• Have a permanent establishment in the UK;
• Not be trading on stock exchange, or have any intentions to do so, at the time of the share issue;
• Not have more than £15 million of gross assets before the shares are issued, and not have more than £16 million immediately afterwards;
• Have fewer than 250 full-time equivalent employees at the time of the share issue; and,
• Be carrying on a qualifying trade with the money raised being used the qualifying trade.

If your company does meet all the qualifying conditions, and although it isn’t a requirement, you should seek approval from HMRC that they agree that investment in your company meets the conditions of the scheme. This makes life a lot simpler at a later date when you complete the Enterprise Investment Scheme Compliance Statement.

Another advantage of obtaining this advanced assurance is that it will provide comfort to any potential investors who are interested in investing in your company and hence make your company seem a more attractive investment opportunity.

HMRC will require you to provide the following in order to ascertain that you do qualify:

• How much you wish to raise;
• Your business plans and forecasts;
• Details of your company’s trade & activities and how much you intend to spend on each;
• If available, the latest set of accounts;
• A copy of the memorandum and Articles of Association; and,
• Any other documentation which evidences that the company meets the qualifying conditions for the scheme.

Once your company has been trading for 4 months or has spent 70% of the EIS funds, you must complete the Enterprise Investment Scheme Compliance Statement. This can be located on the HMRC website at
//public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:///Applications/CorporationTax/1.0/VCSEIS1&template=VCSEIS1.xdp

All successful applications will receive a letter from HMRC long with a unique investment reference number and certificates that you can then provide to your investors.

Please note, that for your investors to be able to enjoy the tax benefits that come from investing in your company, you must follow the scheme for at least 3 years after investment occurs. If you don’t, or your company no longer qualifies for the conditions in that period, there will be a clawback of tax reliefs received by your investors.

The various rules and conditions can become confusing, Invicta can help, we can ensure you stay compliant and offer you support and guidance.

Give Invicta Accounting a call today on 01624 672358 or drop us an email at info@invicta-accounting.com.

As an Investor

As an investor, it is designed to benefit you by offering income tax and capital gains reliefs on EIS eligible investments.

To qualify for the reliefs, you:

• Must be UK taxpayer;
• Must not be connected to the EIS company;
• Must be buying brand new shares of the company;
• Are only able to invest up to a maximum of £1 million each tax year. There is no restriction on the number of qualifying companies you are able to invest in; and,
• Must hold shares for a minimum period of 3 years. If sold earlier than this, some of the reliefs obtained will be clawed back;

What are these tax reliefs?

Income tax relief: You can claim up to 30% of the cost of your investment (up to a maximum of £1 million) in each tax year which is then deducted from your income tax liability.

Please note this will never result in a repayment of tax and so if your liability is less than the relief it can only reduce your liability to £nil, and so resulting in lost relief. However, providing that threshold of £1 million for EIS shares purchased has not already been reached in the previous year, you can elect to treat some of the shares as being issued in that tax relief to obtain income tax relief in that year as well.

You can claim this via your self-assessment income tax return as “other tax reliefs and deductions”. The information that you will require can be found on the certificates that the investee company should have sent you.

Loss relief: If the company you have bought shares in doesn’t perform as well as expected and you end up losing money on the disposal of your shares, you may be able to claim loss relief.

Normally losses incurred on the sale of shares could only be offset against capital gains which has a lower rate of 15% / 20% on gains. Instead, you may offset the loss incurred less any income tax relief given (see above) against your income in the year, or in the previous year, that the shares were disposed of or against your capital gains tax bill for the current or future years. This means that loss relief is given at the equivalent rate to the highest rate of income tax you pay. This is of particular value to higher rate taxpayers who pay tax at a rate of 40% or 45%.
You can claim loss relief against income tax by completing the SA108 form (Capital gains summary).

Capital gains relief: There are two types of capital gains relief.

Deferral relief

Tax arising on capital gains can be deferred until a later date if the gain is invested in shares in an EIS qualifying company. There are no restrictions on the what type the asset is that the gain originally arose on.

Capital gains will be paid when the EIS shares are disposed of however, you the Capital Gain tax exemption may apply (please see below).

To claim deferral relief, you must complete the form that is attached to the certificate you received from the investee company (see above). You should then complete the SA108 form (Capital gains summary) and attach both forms together.

Disposal relief

The gains arising from the disposal of EIS shares may be exempt from Capital Gains tax. To qualify for this exemption, you must have held for shares for at least 3 years.

You can claim loss relief against income tax by completing the SA108 form (Capital gains summary).

Inheritance relief: Provided that the shares are not listed on a stock exchange and that they have been held for a minimum of 2 years you will generally be able to claim relief on Inheritance Tax of 100%.

This relief is given automatically provided shares are held for the above minimum period then the holding is eliminated from your estate value and the full amount is passed on without any tax.

Investment in EIS can be complicated with the various conditions that must be satisfied and the various rules. If you don’t have the time to research the different treatments, or need assistance with completing your self-assessment or would just like some guidance, give Invicta Accounting Limited a call today on 01624 672358 or drop us an email to info@invicta-accounting.com.