EIS Scheme Explained: A Small Business Guide to the Enterprise Investment Scheme

What is the Enterprise Investment Scheme (EIS)? – An Introduction

The Enterprise Investment Scheme is a UK government initiative that was created in 1994 with the aim of stimulating the economy by supporting UK innovation through private investment. The scheme rewards and incentivises private investors to invest in young, smaller-sized, high-risk companies via income tax relief and other tax reliefs.

Between 2022 and 2023, the Enterprise Investment Scheme raised close to £2 billion for more than 4,200 companies. This demonstrates the significant success of the scheme and its continued effectiveness today.

Company Eligibility for the Enterprise Investment Scheme (EIS)

There are specific requirements that an investor and a company must meet before they can be considered for and qualify for participation in the Enterprise Investment Scheme.

Companies can qualify for the EIS program and receive funding via investment as long as they:

• Made their first commercial sale within the last 7 years.
• Have less than 250 full-time employees.
• Have less than £15 million in gross assets.
• They are unlisted on stock exchanges.

On top of this, a company must issue a compliance statement so that an investor can claim EIS relief through income tax reductions, no capital gains tax, CGT deferral relief, loss relief, and inheritance tax relief.

Furthermore, your company must offer a qualifying trade, as some are excluded from the EIS.

The following are some of the trades currently excluded from receiving investment from individual investors via the EIS:

• Property development
• Dealing in land or commodities
• Generating or exporting electricity
• Legal or accountancy services
• Banking, insurance, or money-lending

Qualifying as Knowledge Intensive Companies

There are different criteria for smaller companies that wish to qualify for the scheme as a Knowledge Intensive Company (KIC). Investing in this type of company is considered higher-risk, which is why there are increased tax reliefs in return for EIS investments.

Furthermore, in 2018, greater EIS tax reliefs for investors and relaxation of certain rules for qualifying Knowledge Intensive Companies were introduced.

What is a Knowledge Intensive Company? A KIC is a smaller company that perform development, research, or innovation.

An EIS-qualifying company under the KIC category must:

• Spend a minimum of 15% of its operating costs on development, innovation, or research.
• Alternatively, the company must have spent at least 10% in those areas within the previous three years.
• At the date of share issuance, the company must show strong intentions of developing intellectual property.
• The company has no more than 500 full-time employees on its books.

Again, a company must provide a compliance statement ensuring investors can claim tax relief.

The Help an EIS Company Can Receive

Qualifying companies that are part of the Enterprise Investment Scheme can receive up to £5 million in a 12-month period and no more than £12 million in a lifetime from the EIS or any other government-sponsored venture capital scheme.

Any money raised from EIS investment must go toward a qualifying trade, preparation for a qualifying trade within two years of receiving the investment, or research and development (R&D) that will lead to a qualifying trade.

What can KIC companies receive? A company that qualifies as a KIC can receive up to £10 million in a tax year and up to a maximum of £20 million across its lifetime. Individual investors are now able to invest up to £2 million.

EIS Tax Relief Benefits for Private Investors

Anyone making EIS investments can look forward to a host of tax reliefs, although there are some stipulations that must be met before private investors can claim them.

30% Income Tax Relief

The most attractive tax relief is the up to 30% income tax relief that investors can claim after holding EIS shares for three years. There is a maximum amount of £1 million (£2 million if a KIC) per tax year that investors can invest in an EIS-qualifying company. Meeting this limit would result in income tax relief of up to £300,000 (£600,000 if a KIC investment).

Capital Gains Tax Relief (CGT)

Another tax relief offered through an EIS investment is capital gains tax relief, which means no tax is due on any capital gain made from the investment. This provides tax-free growth if the company becomes successful.

Capital Gains Deferral Relief

Furthermore, if you use any capital gain from an EIS investment or from the sale of assets, you’ll receive Capital Gains Tax (CGT) deferral relief, which means any tax due is deferred.

Inheritance Tax Relief

If you have held shares in an EIS-qualifying company for more than two years, no inheritance tax is payable on those shares by your beneficiaries in the event of your death.

Loss Relief

If a company fails, you’ll lose money as that is the risk you take when making an EIS investment. However, there is loss relief you can claim that will soften the blow. The loss can be offset against income tax in the current or previous tax year.

Alternatives to the Enterprise Investment Scheme (EIS)

If you’re seeking investment for your company, there are some other options you can consider. There is the Seed Enterprise Investment Scheme (SEIS), which is focused on start-ups and younger companies or there is the venture capital trust.

Seed Enterprise Investment Scheme (SEIS)

The SEIS is a sister scheme of the EIS that helps start-ups and younger companies raise money through investment. Like the income tax relief an investor receives under EIS, there are tax benefits for anyone who invests as part of the SEIS scheme.

Investors can claim up to 50% income tax relief, and they will also benefit from capital gains tax relief, deferral relief, and other benefits similar to those received through the EIS.

To qualify for new investments from the SEIS scheme, your company must:

• Have been trading for a minimum of two years.
• Have no more than £350,000 in gross assets.
• Must have fewer than 25 full-time employees.

Venture Capital Trusts (VCTs)

Another avenue to consider when seeking investment are Venture Capital Trusts (VCTs), which are publicly listed companies that specialize in channelling funds into a range of qualifying entrepreneurial companies.

Similar qualifying requirements apply to companies seeking investment from a VCT as with the EIS. The company must have gross assets of less than £15 million and fewer than 250 employees. The main difference is that a VCT requires at least 70% of investments in qualifying holdings and derives no more than 15% of its income from non-qualifying holdings.

Investors hold shares in the VCT itself rather than in individual companies, which is considered less risky. The VCT maintains a portfolio of companies it invests in, so investors benefit from the performance of the entire portfolio rather than relying on the success of a single company.

As for the benefits an investor will receive, these are similar to the EIS tax reliefs:

• 30% upfront income tax relief on investments up to £200,000 per tax year.
• Capital gains tax exempt on profits from VCT investments.
• Tax-free dividends from Venture Capital Trust investments, providing ongoing tax benefits.

How to Apply for the Enterprise Investment Scheme

To apply for the Enterprise Investment Scheme (EIS), there are certain steps you must follow. The process can take a while to complete, but should your company get accepted, you can potentially get the investment it requires.

• Obtain the application form from HMRC.
• If you’ve already received advance assurance, provide copies of documents that have changed since then.
• If you haven’t received advance assurance, submit the following information about your company and any subsidiaries:
• Business plan and financial forecasts.
• Latest accounts or bank statements.
• Explanation of how you meet the risk to capital condition.
• Details of all trading and planned activities, including projected expenditure.

Once your application is in, you just have to wait to see if you’re accepted and will be informed on the next steps you will have to take.

The Bottom Line

Hopefully, we have cleared up everything you need to know about the Enterprise Investment Scheme and the benefits it can bring to your company and any investors. For companies, the scheme is a fantastic option if they’re seeking investment, and while investors take a risk, it is offset by the EIS tax relief they receive.

There is no guarantee of success via venture capital schemes such as the EIS, but there have been thousands of success stories since the scheme started in 1994. If you’re thinking of using the EIS to help your business succeed, we wish you all the best.

Enterprise Investment Scheme FAQs

What are the tax reliefs for an EIS investor?

Investors can claim up to 30% income tax relief, amounting to a maximum of £300,000 per tax year, provided they hold the shares for at least three years. Additionally, they benefit from capital gains tax relief if the shares are sold at a profit. Investors also receive inheritance tax relief and loss relief benefits in case the EIS company folds.

How long do I have to hold SEIS or EIS shares before I can claim tax relief?

To claim tax relief via the EIS or SEIS, you must hold shares for a minimum of three years before you can dispose of them.

Are there other venture capital schemes alongside the EIS?

Yes, companies can seek investments from initiatives such as the Seed Enterprise Investment Scheme or consider a Venture Capital Trust. Those who invest via either will receive similar income tax benefits as the EIS tax relief given as part of the EIS.

What is the minimum investment required through the EIS?

There is no minimum investment required through EIS for any single company in a tax year. Investors can claim income tax relief of 30% on investments, up to £1,000,000 in a tax year, which allows for a maximum tax reduction of £300,000 per year, provided the investor has enough Income Tax liability to cover it.

How does the EIS help the UK economy?

The EIS and other venture capital schemes boost economic growth in the UK by investing in small and young companies, helping them to grow and succeed. This enhances production and creates jobs in the United Kingdom.

What are the requirements for a business to qualify for EIS investment??

The company must have achieved its first commercial sale within seven years, employ fewer than 250 people, and have gross assets not exceeding £15 million.

What if my company does not qualify for the EIS?

You’ll have to seek investment through another venture capital scheme or, if those are not viable options, seek investment elsewhere.