What is the Enterprise Investement Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a government initiative aimed at encouraging investment in early-stage businesses through venture capital.

Schemes

What is the EIS?

Introduced in 1994, the Enterprise Investment Scheme (EIS) provides tax benefits to individual investors who purchase new shares in a company. This scheme can enhance a company's appeal to investors, facilitating fund-raising and business expansion. Under the EIS, a business can raise up to £5 million annually, with a lifetime limit of £12 million. These limits include amounts received from other venture capital schemes, provided the initial investment was made within seven years of the company's first commercial sale. To benefit from the EIS, ensure your company is eligible and complies with its rules, allowing your investors to claim and retain the associated tax reliefs. Non-compliance with the scheme's rules for at least three years after the investment could result in tax reliefs being withheld or withdrawn from investors.

What Companies are eligible for the EIS?

The EIS has specific guidelines that companies must adhere to, which are detailed on the Gov.uk website.

The key rules include that the company:

must not be listed on the London Stock Exchange or any other recognised stock exchange. Notably, companies that are listed on AIM and the Aquis Stock Exchange aren’t considered quoted
should not be under the control of another company
can’t control any non-qualifying subsidiaries. A qualifying subsidiary is one where over 50% of the shares are held by the parent company, and it’s not controlled by another company. However, if EIS funds are applied, the subsidiary must be at least 90% owned, as should a property managing subsidiary
has gross assets that do not exceed £15 million before the EIS share issue or £16 million immediately after the share issue
at the time the shares are issued, has fewer than 250 full-time employees (or their equivalents)
must have a ‘permanent establishment’ in the UK (effective from 6th April 2011)
can’t raise more than £5 million of state aid risk finance, including EIS, in any twelve-month period, or a total of £12 million
should not have been trading for more than seven years prior to raising its first EIS finance.

These rules, especially those regarding control by another company, qualifying subsidiaries, and the company carrying on trade, must be adhered to throughout the three-year EIS qualifying period.

If these conditions aren’t met, the investors could lose their reliefs.

Finally, the funds raised must be used for the growth and development of the business, not for acquiring a trade or business, certain intangible assets, or shares in another company.

It’s worth noting that there are different eligibility criteria if your company can be defined as knowledge intensive.

KNOWLEDGE

What is a Knowledge-Intensive Company

For the purposes of the EIS, a knowledge-intensive company is defined as:

< 500 Employees

Having less than 500 employees at the time shares are issued

Create Intellectual Property

Is conducting work that will create intellectual property and foresees that this intellectual property will generate the majority of the company’s business over the next ten years

20% Employees Doing Research

Having 20% of the company’s employees engaging in research for a period of at least three years from the date of investment. These employees need to have either a relevant Masters degree or higher degree to qualify.

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What type of businesses are eligible for the EIS?

Most trades can qualify for the EIS, but there are some exceptions listed on the Gov.uk website.

Certain trades, such as property, are explicitly ineligible for the EIS. However, other business activities may qualify even if they initially seem ineligible.

If you’re uncertain about your company’s eligibility, it is advisable to consult with an experienced professional.

Additionally, a company can engage in some ineligible activities under the scheme, but these cannot constitute a ‘substantial’ portion of the company’s trade.

According to HMRC guidelines, ‘substantial’ is defined as more than 20% of the company’s trading activities.

Therefore, it’s crucial to ensure that any excluded activities your company undertakes do not exceed this threshold.

Knowledge-Intensive Companies and the EIS

If your company is knowledge-intensive and engages extensively in research, development, or innovation, you can still apply for the EIS scheme with relaxed eligibility criteria.

Knowledge-intensive companies remain eligible for the EIS even if:

They need to raise more money than the usual scheme permits (£12 million lifetime limit).
Their company is older than the scheme typically allows (seven years).
The investor seeks to utilize higher investor limits.

To qualify for the EIS as a knowledge-intensive company, the applicant must be conducting research, development, or innovation at the time of issuing shares and:

The company’s first commercial sale and annual turnover exceeding £200,000 occurred less than ten years ago.
The investment amount sought is over the normal EIS limit but below the knowledge-intensive company limit (£10 million per year and £20 million over the lifetime of the company and any subsidiaries).
The company otherwise meets the EIS scheme’s eligibility criteria.

How does a company take part in the EIS?

Before issuing your shares, it’s advisable to seek advance assurance from HMRC to confirm your business qualifies for the EIS.

Once you have advance assurance, you can proceed with a compliance statement.

A compliance statement (EIS1) can be submitted to HMRC by a Company Secretary, Director, or Agent. If you cannot submit the statement yourself, you can authorize an agent to apply on your behalf. The agent will need to provide a letter, signed and dated within the last three months, confirming their authorization to act for you.

The process includes the following steps:

Issue your shares.
Fill out the compliance statement (EIS1).
Send the completed EIS1 form to HMRC.

If you obtained advance assurance from HMRC, provide copies of any documents that have changed since assurance was granted.

For companies without advance assurance, you must submit comprehensive information for both your company and any subsidiaries, including:

The business plan and financial forecasts
A copy of the most recent accounts
An explanation of how the risk-to-capital condition is met, showing that your company aims for long-term growth and that the investment poses a risk to investors’ capital
Details of all planned trading activities, including projected expenditure for each
An up-to-date copy of the memorandum and articles of association
The information memorandum, prospectus, or other fundraising documents
Details of any agreements between your company and the shareholders
A list of amounts, dates, and venture capital schemes from which previous investments were received
Any other documents needed to demonstrate that you meet the qualifying conditions

If applying as a knowledge-intensive company, you will need to provide supporting evidence to HMRC.

You can only submit your compliance statement after engaging in your qualifying business activity for four months. The submission must be made within two years of this date or within two years of the end of the tax year in which the shares were issued, whichever is later.

A new compliance statement is required for each share issuance.

Please note, once shares are issued under the EIS, the company cannot issue shares under the Seed Enterprise Investment Scheme (SEIS).

Can I combine the EIS with other schemes?

You can utilize the EIS alongside other forms of funding.

However, under UK tax relief schemes, a company can raise a maximum of £5 million in total from the following sources within any 12-month period:

Enterprise Investment Scheme (EIS)
Venture Capital Trusts (VCT)
Seed Enterprise Investment Scheme (SEIS)
Social Investment Tax Relief (SITR)
State aid approved under risk finance guidelines (for advice, consult with the provider of the aid)

Additionally, there is a lifetime limit of £12 million for your company from these sources. This limit includes funds received by any current or former subsidiaries, as well as businesses your company has acquired.

For more information on EIS, refer to HMRC’s Venture Capital Schemes Manual.

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