What is EIS?
The Enterprise Investment Scheme is now 25 years old and through it, qualifying companies have raised over £18 billion. Administered in HMRC by the Venture Capital Reliefs Team (VCRT) – formerly the Small Companies Enterprise Centre (SCEC) – EIS allows investors to invest up to £1m in EIS companies in any year (£2m if the company is “knowledge intensive”).
A company can raise up to £5 million each year and a maximum of £12 million in the company’s lifetime (unless the company is “knowledge intensive” with different limits).
What are the benefits?
Investors are entitled to 30% tax relief on the investment amount (if certain conditions are met) and any gain on the shares invested in is Capital Gains Tax free. Investors can also benefit from loss relief if shares are disposed of at a loss as well as Capital Gains Tax deferral relief.
What are the requirements?
There are various legislative requirements (ITA 2007) in order to be eligible to apply for EIS, from the side of both the investor, and the company raising the funds. Companies must ensure they satisfy the new Risk to Capital (R2C) condition at Section 157A ITA 2007 and continue to follow the scheme rules even after investment received. Individuals must follow the scheme rules to ensure that they are eligible to claim and do not subsequently lose tax relief.
There are various ‘excluded activities’ listed at Section 192 ITA 2007. The company will not have a qualifying trade if excluded activities amount to a substantial part of company’s activities and while the word “substantial” is not defined in the legislation, HMRC normally interpret this as 20%.
What is the R2C Condition?
The Risk to Capital condition acts as a gateway test with the intention of eliminating capital preservation and promoting growth in riskier developments. It is a principle-based test on individual merits and does not target certain trades or activities. An investment must satisfy the following R2C conditions:
- The company in which the investment is made must have objectives to grow and develop over the long term
- The investment must carry a significant risk that the investor will lose more capital than they gain as a return (including tax relief)
The growth and development condition is generally considered to be an aim to increase turnover, increase the number of employees, increase the company’s client base and not using the funds to finance projects wholly. Risk of loss of capital is generally as a risk of losing the money invested, and considers the net investment return, i.e. how much this offsets the risk. Subcontracting, ownership and management structure as well as marketing of the investment are also factors in looking at risk to capital.
What is Advance Assurance?
Advance Assurance is confirmation from HMRC that an investment would meet the criteria for EIS. Companies submit an EIS Advance Assurance (AA) and VCRT review to determine if application passes the R2C conditions.
If HMRC believe the AA fails risk to capital, they inform the company, which has the opportunity to correct any misunderstandings, although there is no right to appeal.
The company subsequently receives a Unique Investment Reference Number (UIR) on form EIS2 from the VCRT and this is passed to the investor on form EIS3. The UIR is specific to that company Compliance Statement, not the individual investor and all UIR’s relating to investments in that year should be put on the investor’s tax return.
Common Errors relating to EIS
Common errors include:
- Changing documents once application submitted
- Not providing investor details when applying
- Failing to provide a separate compliance statement for each share issue date and share class
- Company not providing VCRT with full details
- The investor claiming relief before they have been issued an EIS3
For more information, and to apply, please contact us.