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Enterprise Investment Scheme

The Enterprise Investment Scheme allows qualifying companies to access equity investment from new and, in some cases, existing shareholders. The shareholders obtain potentially attractive tax breaks. At AHACCOUNTANTS, we can assist you if you are interested in financing your business in the Nottingham area or in providing capital to businesses.

The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies raise capital. It does so by providing income tax and Capital Gains Tax (CGT) reliefs for investors in qualifying shares of these companies.

EIS Reliefs Available

There are really two separate schemes within the EIS:

  1. A scheme providing income tax relief on the investment and a CGT exemption on gains made when the shares are disposed of.
  2. A scheme aimed at providing CGT deferral.

An individual may be able to take advantage of either or both of these schemes, provided they meet the relevant conditions outlined below.

Income Tax Relief

Investors may receive income tax relief at 30% on their investments of up to £1,000,000 a year (or £2 million a year for knowledge-intensive companies from 6 April 2018). The income tax relief is withdrawn if the shares are disposed of within three years.

Eligibility for income tax relief is restricted to companies with which you are not ‘connected’. This is detailed in the section “How to Qualify for Income Tax Relief” below.

CGT Exemption

Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn. The CGT exemption may be restricted if an investor does not receive full income tax relief on the subscription for EIS shares. Losses on the disposal of EIS shares are allowable, but the amount of the capital loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of. A capital loss arising from the disposal of EIS shares can be set against income.

CGT Deferral

Gains arising from disposals of any assets can be deferred against subscriptions for shares in any EIS company. Shares do not need to have income tax relief attributable to them to qualify for deferral relief. The gain will become chargeable in the tax year when the subscription shares are disposed of. There is no upper limit on the amount of deferral relief available to an individual, although there is a limit on investment in a single company or group of companies.

Qualifying Companies

To be eligible for any of the reliefs, companies must meet certain conditions:

  • The company must be unquoted when the shares are issued, with no arrangement in place at that time for it to cease to be unquoted.
  • All shares issued must be for raising money for a qualifying business activity.
  • The money raised by the share issue must be wholly employed within a specified period by the company.
  • The investment must generally be made within seven years of the company’s first commercial sale.
  • The company or group must generally have fewer than 250 full-time employees.
  • The size of the company is limited to £15 million (gross assets).
  • The amount of capital raised in any 12-month period is limited to £5 million (£10 million for knowledge-intensive companies from 6 April 2018).
  • The company must not be regarded as an ‘enterprise in difficulty’ under EC guidance.
  • The company need only have a permanent establishment in the UK rather than carrying on a qualifying trade wholly or mainly in the UK.

Qualifying Business Activities

A trade will not qualify if excluded activities constitute a substantial part of the trade. The main excluded activities are:

  • Dealing in land, commodities, futures, or shares, securities, or other financial instruments
  • Financial activities
  • Dealing in goods outside the ordinary retail or wholesale distribution
  • Leasing or letting assets on hire
  • Receiving royalties or licence fees, except in certain cases arising from film production or research and development
  • Providing legal or accountancy services
  • Property development
  • Farming or market gardening
  • Holding, managing, or occupying woodlands
  • Operating or managing hotels, guest houses, or hostels
  • Operating or managing nursing homes or residential care homes
  • Shipbuilding
  • Coal and steel production.

Time Period for Investment

The time limit for the employment of money invested is two years from the issue of the shares or, if later, two years from the commencement of the qualifying activity.

Changes to the Rules for Qualifying Companies

Over the years, governments have made amendments to what constitutes qualifying companies for EIS. The thrust of these changes is to ensure well-targeted support for investment into small and growing companies, particularly focusing on innovative companies. For example, the conditions for knowledge-intensive companies differ from some of those mentioned above.

How to Qualify for Income Tax Relief

Eligibility for income tax relief is restricted to companies with which you are not ‘connected’ at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.

You can be connected with a company in two broad ways:

  1. By virtue of the size of your stake in the company.
  2. By virtue of a working relationship between you and the company.

In both cases, the position of your ‘associates’ is also considered.

Size of Stake: You will be connected with the company at any time when you control, directly or indirectly, possess, or are entitled to acquire more than 30% of the ordinary share capital of the company.

Working Relationship: You will be connected with the company if you have been an employee or a paid director of the company. An exception exists if you become a paid director of the company after the shares were issued. You must never have been connected with the company previously and must not become connected with it in any other way. Additionally, you must never have been involved in carrying out the whole or any part of the trade or business conducted by the company.

How to Qualify for CGT Deferral Relief

You can defer a chargeable gain that accrues to you on the disposal of any asset. Furthermore, you can defer gains arising from earlier EIS, Venture Capital Trust (VCT), or CGT reinvestment relief investments.

There are some restrictions on investments against which gains can be deferred, designed to prevent relief from being obtained in circumstances where there is a disposal and acquisition of shares in the same company.

Receiving Value from a Company

The EIS is subject to several rules to ensure that investors do not obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.

Examples of circumstances in which you would be treated as receiving value from the company include situations where the company:

  • Buys any of its shares or securities from you
  • Makes a payment to you for relinquishing the right to payment of a debt (other than an ordinary trade debt)
  • Repays a debt owed to you that was incurred before you subscribed for the shares
  • Provides you with certain benefits or facilities
  • Waives any liability of yours or an associate’s to the company
  • Undertakes to discharge any such liability to a third party
  • Lends you money that has not been repaid before the shares are issued.

Receipts of ‘insignificant’ value will not lead to the withdrawal of relief.