A business that meets the Enterprise Investment Scheme (EIS) criteria could attract more investors. Investment into businesses that are qualifying, attract income tax and capital gains tax reliefs for the investor.
Where the business is less established for the purposes of EIS, it may be eligible for the Seed Enterprise Investment Scheme (SEIS). It is possible that a company qualifying for SEIS will become one that qualifies for EIS.
There are different qualifying criteria for each scheme and they offer different levels of tax relief. For example, SEIS investors will receive income tax relief of 50% of the cost of the shares, whilst EIS investors receive income tax relief of 30%.
The potential relief available to an individual investor in the ordinary shares of a qualifying company are:
- A 30% deduction of the investment value (max £1m) against the investor’s income tax liability: the relief reduces the tax liability. Total income chargeable to income tax is calculated, personal allowances and other reliefs are deducted, and the income tax liability calculated before EIS relief is used to reduce that tax liability. The relief cannot create a refund.
- If the investor has made a previous gain, they may be able to defer the liability on that gain by investing in EIS qualifying shares: the amount of gain that is deferred directly correlates to the amount of sales proceeds and the amount invested. The investor must invest within the period twelve months before and ending thirty-six months after the disposal although HMRC have discretion to extend the period. A claim may not be made before HMRC issue an EIS3 certificate and before five years after the first 31 January after the tax year in which the shares were issued. If the EIS shares cease to be qualifying or are sold, the deferred gain will be realised.
- An investor who has held qualifying EIS shares (and remained qualifying) for at least three years will not suffer Capital Gains Tax on their disposal. The period of three years starts either from the date of ownership or commencement of the trade if later. If the disposal gives rise to a loss, that loss reduced by the income tax relief given will be available for offset against any other gains and income.
A qualifying company is broadly:
- Unquoted and one not intended to list
- One which has a permanent establishment or fixed place of business in the UK
- Has gross assets less than £15m immediately before the share issue and less than £16m immediately after the issue
- Has less than 250 full time employees
- Not controlled or have arrangements to be controlled by another company when the shares are issued
- Preparing (within two years) to or undertaking a qualifying trade or conducting research and development
- Is going to use the funds raised within two years for trading purposes or continue with relevant research and development; the funds cannot be used to acquire another business or trade
- One which made its first commercial sale less than 7 years ago although, if the company did not receive investment within the first 7 years and wants to raise money for a different activity it may be qualifying subject to further conditions
The following table compares EIS and SEIS for an individual investor:
|Income tax reduction||30% of invested funds||50% of invested funds|
|Order of income tax reduction||After VCT relief||Before VCT relief|
|Deferral relief||Defers a capital gain||For 2013/14 onwards, exempts half the capital gain|
|Maximum relief investment per investor||£1,000,000||£100,000|
|Disposals||Gains exempt after three years and losses allowable for offset against gains and income||Gains exempt after three years and losses allowable for offset against gains and income|
The following table compares some of the company differences for EIS and SEIS:
|Maximum investment||£5m from all schemes in any twelve-month period|
£12m for all companies
£20m for knowledge intensive companies
|Maximum age||Less than 7 years old when it receives its first investment|
Less than 10 years for knowledge intensive companies
No time limit for follow on funding
|Less than 2 years old and company must not have previously carried on a trade.|
|Maximum number of full time equivalent employees||< 250 |
< 500 if knowledge intensive company
|Disposals||Gains exempt after three years and losses allowable for offset against gains||Gains exempt after three years and losses allowable for offset against gains|
|Balance sheet gross assets limit||£15m before and £16m after investment||£200,000 before investment|
|Purpose||For a qualifying trade||For a new qualifying trade|
A knowledge intensive company is one that at the date of the share issue meets an “operating cost condition” plus an “innovation condition” and/or a “skilled employee condition”.
Operating costs conditions: (1) In any one or more of the three previous years, at least 15% of the relevant operating costs was spent on research, development or innovation; OR (2) In each of the previous three years at least 10% of the relevant operating costs was spent on research, development or innovation.
Innovation conditions: (1) The company (or subsidiary within the group) is engaged in intellectual property creation at the date of issue; AND (2) It is reasonable to assume that in 10 years the exploitation of the intellectual property will form the greater part of the company’s business.
Skilled employee condition: At least 20% of the full time equivalent employees are skilled employees, which are those with a masters degree or above who are engaged directly in research, development or innovation activities.
A company needs to conduct a qualifying trade to be eligible for EIS and SEIS. The definition of a qualifying trade is given by defining excluded activities and trades:
- Dealing in land, commodities, futures, securities or financial instruments (including investment activities)
- Dealing in goods other than normal retail or wholesale distribution
- Banking, insurance, hire purchase, money lending, and other financial activities
- Receipt of royalties or licence fees
- Legal and accounting services
- Property development
- Farming and market gardening
- Operating or managing hotels or residential care homes
- Coal production, steel production and shipbuilding
- Solar or wind power generation from which feed-in tariffs, renewable obligation certificates (ROCs) and renewable heat incentives (RHIs) are derived (from 6 April 2015)
- Providing services to a non-qualifying business under similar ownership