What is the EIS and how does it work?
What is the Enterprise Investment Scheme (EIS)?
The Enterprise Investment Scheme (EIS) is a UK government-backed initiative that rewards individuals who invest in qualifying small and medium-sized companies. It was introduced in 1994 to encourage innovation and entrepreneurship.
The scheme rewards individual investors through tax reliefs.
The scheme is very popular and impactful. In the 2020/21 tax year, 3,755 companies raised a total of £1.658 billion of funds through the EIS scheme
What kind of tax relief does the EIS offer?
To qualify as an investor that can use the EIS, the investor must not be an Employee of the company at the time of investment, and they cannot hold more than 30% of the shares of a company before the investment is made.
If the company counts as a knowledge intensive company, the investment cap rises to £2 million. Companies may count as knowledge intensive if for example they spend a sufficient part of their operating costs on research and development, or 20% or more of a company's full-time Employees have a higher education qualification and their work for the company is in the same academic field.
The scheme also provides exemption from Capital Gains tax on any profits made from selling shares held for at least three years. Loss relief is available in case the company fails and the rate of tax relief for this is equal to the investor's highest rate of Income Tax that they pay. And finally, no Inheritance Tax is owed on any EIS shares have been held for at least two years.
What types of companies qualify for EIS funding
To qualify for EIS funding, a company must be UK-based, have fewer than 250 employees, and have gross assets worth less than £15 million before the investment and worth less than £16 million after the investment.
Companies must not be involved in excluded trades like banking, insurance, property development etc. This only applies to companies that have 20% or more of their trading activities fall into excluded activities. These companies cannot apply for funding through the EIS.
There are limits on the total amount that can be raised through EIS funding, which is £5 million per year or a £12 million maximum in a company's lifetime.
Companies must spend investment from the EIS on growing and developing the business, and the money must be spent within two years of the investment.
How do I claim EIS tax relief?
To claim EIS tax reliefs as an investor, you need to have the following documents:
- EIS3 form: This is the most crucial document, provided by the company you've invested in. The EIS3 form is a tax relief claim form that certifies the company's eligibility for EIS and provides details about your investment. The company should have received advance assurance from HMRC, confirming its EIS eligibility before issuing the EIS3 form.
- Share certificate: You should have a share certificate or other proof of investment, indicating your ownership of shares in the EIS-eligible company.
- Investment details: Keep a record of the investment date, amount, and any related transaction documents.
Once you have these documents, you can claim your EIS tax reliefs by including the information in your Self Assessment. If you haven't yet received your EIS3 form but want to claim the relief, you can contact the company and request the form. Remember that you must hold the shares for at least three years to retain the tax benefits associated with the EIS investment.
Is the EIS a good way to support small and medium sized businesses?
Yes, the EIS is a great way to support these businesses while also benefiting from some significant tax relief. It can be a good way to diversify your portfolio and potentially earn a higher return on your investment.
The Seed Enterprise Incentive Scheme (SEIS) may be more tax-efficient for individuals investing in early-stage businesses. These investments are more risky so there are higher tax incentives available. However, the SEIS does not apply to the larger businesses that the EIS does.