EIS Checklist – Why Investors May Fail To Qualify For Relief?

Enterprise investment scheme (EIS) is a venture capital scheme designed for companies to raise money with the help of individual investors, for growth and development of the business.

It offers generous tax reliefs to the individual investors who buy new shares in the company. Individuals investors can claim a repayment of 30% in income tax on their investment and any profit made from selling of shares will be tax exempt. There are many rules related to EIS scheme and every year new rules are adding to it. The company must comply with EIS rules for at least 3 years after receiving the investment. If it follows EIS rules properly, the investors will be able to claim and keep EIS tax reliefs otherwise tax reliefs will be withheld or withdrawn from the investors.

Every company must strictly comply with EIS checklist containing all EIS rules, to ensure their investors can claim tax reliefs on the amount they invested in the company in the form of shares.

Enterprise investment scheme (EIS) Checklist

• Under EIS scheme, a company can raise up to £5 million every year and a maximum of £12 million (£20 million for a knowledge intensive company) in their lifetime.
• A Company can only use this scheme if the company has a permanent establishment in the UK at the time of issuing of shares for the next 3 years. Issuing company must have a registered office in UK through which business operations are managed.
• A group or company must not involve in more than 20% of non-qualifying activities or non-trading activities such as dealing in land, shares, commodities, future, insurance, banking or other financial activities, providing legal or accountancy fees, leasing or letting or receiving royalties, or license fees, property development, operating guest houses, hotels, nursing or residential care homes whereas royalties or license fee from intellectual property will be considered as a qualifying trade.
• The group or a company must have less than or equivalent to 500 full time employees including directors in case of “knowledge intensive company” and less than 250 full time employees in case of other companies.
• The group assets of the group or a company must not exceed £15 million before and £16 million after issuing of EIS shares.
• The company must not be a 51% subsidiary or under the control of any other company.
• The shares must be issued within 7 years of the first commercial sale made by the group or a company. However, this period may be extended in various circumstances.
• The shares must be issued by the company and subscribed by the investor for commercial purposes and not for the purpose of tax avoidance.

• The money raised by the company must be –

  • Used within 2 years of the investment.
  • Not be used to buy part or all of another business
  • used to grow your business
  • Must carry a significant risk that the investors may lose more capital than he or she will gain as a return.
• The financial condition of the company must be good at the time of investment.
• Employees of the company are not eligible for the relief unless they become directors. Directors are eligible in case they are not paid (with no entitlement to be paid), or paid reasonably and never been connected with the company before doing investment.

• EIS relief can be claimed only in case of ordinary shares. It cannot be claimed in case -

  • They are not ordinary shares
  • They are having preferential rights
  • They are issued for non-cash consideration
  • They are not fully paid up on issue
• An existing shareholder cannot usually qualify for EIS scheme unless all their shares attracted relief under EIS, social investment tax relief scheme or SEIS; or were issued subscriber shares.
• An individual investor cannot claim relief in case he or she has borrowed money and lender would not have offered funds on the same terms in the absence of the investment in shares.

• Investors are not eligible for EIS in case –

  • He or she is having more than 30% -
    of the votes of the company
    Or
  • its Ordinary shares
    Or
  • its issued shares
    Or
  • In case they are having entitlement in more than 30 % of its assets available for distribution.
    Or
  • In case they are controlling the company
• The company must not be listed and there should not be any arrangement for listing has been made on a recognized stock exchange on the issuing date (other than AIM or most PLUC markets)
• There must not be any arrangement for sale of the shares or business or trade to come to an end. There must not be any arrangement to protect the investor against the risk of incurring loss on shares.
• There must not be any arrangement made by the company to make payments to their investors or any other person in connection with investor.
• There must not be any arrangement to break the business artificially in order to fit within the EIS conditions.
• There should not be any arrangement made by the company to sell any subsidiary other than for commercial reasons. The company must not contain a property managing subsidiary other than a 90% subsidiary.
• The trade or research development must be carried on by the company for at least 4 months except the case in which company is wound up for genuine commercial reasons.

If you will follow the above mentioned EIS checklist, it will contributes to your business growth and your investors will get the opportunity to claim EIS tax reliefs on the amount they invested in your company in the form of shares.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.