The Enterprise Investment Scheme (EIS), if approach it with prudence, can be a very effective way to invest your money. Broadly speaking, the EIS is a UK tax relief launched in 1994 and gives both, investors and business owners, some kind of privilege. For the company to rise funds and for the investors to save tax and avoid losing money in real time because of inflation.
However, it also has its risks. One of them is that the invested capital of investors is not safe, comparing with a standard way of buying shares. But in the end, this is the main goal - to help less attractive and less secure companies to raise funds for their developments.
PART I | EIS & Investors - some of vital aspects to know.
All shares must be paid in full, when they are issued. If not, investments failing to qualify for tax relief under EIS.
Shares must be full-risk ordinary shares, not be redeemable or have a preferential rights in the event of a winding up of company.
Income Tax Relief is available to individuals only (although this can be through a nominee) for those who subscribed for shares in an EIS scheme. The relief is at 30% of the cost of the shares. In a scenario where the company fails completely, the amount of cash that an investor can "claim back" is 61.50%.
Relief can be claimed up to a maximum of £1,000,000, giving a maximum tax reduction in any one year of £300,000.
The shares must be kept for at least three years. But if the qualified trade began after the shares were issued, the period is 3 years from the date of commencement of trade.
Income tax relief can be claimed only by persons who are not "connected" with the company. Search on GOV.UK for details.
The investor cannot claim relief until the company sends him a form EIS3, or EIS5 If you invest through an Approved Enterprise Investment Scheme (EIS). Once the investor receive one of the above document, then the claim can be made on the Self Assessment tax return.
PART II | EIS & Company - some of vital aspects to know.
In order for investors to claim and retain EIS tax relief, in respect of their shares, the company issuing shares must comply with a number of rules concerning.
Speaking generally, the company cannot be listed on the London Stock Exchange or any other recognized stock exchange. This also applies to its subsidiaries.
Companies can not collect more than 5 million pounds sterling in a total of 12 months from venture capital schemes. The schemes are the EIS, the SEIS and Venture Capital Trusts.
The money raised by the share issue, can be used either for the purpose of an existing qualifying trade or for the purpose of preparing to carry on such a trade. Alternatively it can be used to carry on research and development intended to lead to such a qualifying trade being carried on. If these requirements are not met then the investors will not be eligible for relief on the cost of their shares, and any relief given will be withdrawn.
The trade must be conducted on a commercial basis with a view to the realisation of profits. Most trades qualify, but some do not. Those that do not are termed ‘excluded activities’ - Search on GOV.UK for the list.
There is no requirement that the qualifying company is resident in the UK, but for shares issued on or after 6 April 2011, the company must have a ‘permanent establishment’ in the UK. See VCM13030.
The EIS is administered in HMRC by the SCEC. Therefore the SCEC decides if a company and a share issue qualifies, once the interested company sent the application with its interesting.
Look at the 3 simple scenarios below to better understand how it works. For simplicity, we took small and rounded numbers.
This article intents to provide an overview of the EIS. It does not cover all the aspects. So companies and investors who are interested to take action on this matter, should seek for more and in depth professional advise and not rely solely on this article. Also bear in mind that the legislation relating to EIS may change in the future.
More details you can find on GOV.UK