Depending on an individual investor’s personal tax circumstances, EIS can provide Income Tax relief worth 30% on a maximum annual investment of £1 million per investor who has a stake of less than 30% in the company. If a loss is made on the shares, this can be offset against Income Tax.
EIS also provides potential exemptions from Capital Gains Tax (CGT) on gains of a sale of a EIS investment, and deferral of CGT from disposal of any assets where the gains are reinvested through EIS in the same year.
There is a £5 million limit to the funds that can be raised by a company under different types of venture capital scheme, including EIS, in any 12 month period. This includes money raised through Venture Capital Trusts, Seed Enterprise Investment Schemes and a number of other funding arrangements available to small and medium-sized enterprises.
EIS funds must be spent on a qualifying business activity within two years of investment.
In order for a Company to qualify under this Scheme, it must satisfy certain requirements. These are:
Gross Assets: must not exceed £15 million before the shares are issued, or £16 million after
Number of employees: must not exceed 250. This figure is deemed to apply to all companies within a group
Trading period: the company must have been trading for at least four months
Permanent establishment: the company must have a permanent UK establishment or be resident in the UK (for shares issued after 6 April 2011)
The shares must be:
- new (i.e. subscribed for and thereafter allotted by the company);
- ordinary (i.e. not having any special rights, as a class); and
- fully paid up in cash.
For the period of (in most cases) three years after the allotment of such shares, the shares in question must not:
- carry any preferential rights to (i) dividends; or (ii) the company’s assets on winding up; or
- carry any right to be redeemed.
Within two years of the date of issuing the relevant shares, the funds raised must be spent for the purposes of a qualifying business activity. If this condition is not met, investors will not be able to claim tax relief. A qualifying business activity is either:
- carrying on a qualifying trade
- the activity of preparing to carry on a new qualifying trade which the company intends to, and begins to carry on
- carrying on research and development which will lead to or benefit a new qualifying trade
A “qualifying trade” is one conducted on a commercial basis with a view to realising a profit. For the purposes of EIS, most trades will qualify but there are notable exceptions, including:
- dealing in land, in commodities or futures in shares, securities or other financial instruments
- dealing in goods, other than in an ordinary trade of retail or wholesale distribution
- financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
- leasing or letting assets on hire, except in the case of certain ship-chartering activities
- receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)
- providing legal or accountancy services
- property development
- holding, managing or occupying woodlands, any other forestry activities or timber production
- operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment
More excluded trades can be found on the HMRC website at http://www.hmrc.gov.uk/eis/part2/2-4.htm.
A person qualified to claim the relief offered by EIS must also fulfil certain conditions. These are:
Fully paid up shares: shares must be paid up in full at date of issue and subscribed to that person (or a nominee)
Shareholding: The shares must be held for three years for the relief to apply
No “Substantial Interest”: the person cannot own more than 30% of the company’s issued share capital. Shareholdings of associates are included in this, which includes business partners, trustees or relatives.
Employment: the person cannot have been employed by the company in the two years before the date of the share issue, or in the three years following it. However, directors may qualify for EIS relief provided certain conditions are met.
Relief under EIS may be reduced or withdrawn within three years of the date of issue of the relevant shares in certain circumstances. Full details of this are available from the HMRC website.