How the scheme works
EIS is designed so that your company can raise money to help grow your business. It does this by offering tax reliefs to individual investors who buy new shares in your company.
Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes. Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale.
You must follow the scheme rules so that your investors can claim and keep EIS tax reliefs relating to their shares. Tax reliefs will be withheld or withdrawn from your investors if you do not follow the rules for at least 3 years after the investment is made.
What money raised can be used for
The money raised by the new share issue must be used for a qualifying business activity, which is either:
- a qualifying trade
- preparing to carry out a qualifying trade (which must start within 2 years of the investment)
- research and development that’s expected to lead to a qualifying trade
The money raised by the new share issue must:
- be spent within 2 years of the investment, or if later, the date you started trading
- not be used to buy all or part of another business
- pose a risk of loss to capital for the investor
- be used to grow or develop your business
Companies that can use the scheme
Your company can use the scheme if it:
- has a permanent establishment in the UK
- is not trading on a recognised stock exchange at the time of the share issue and does not plan to do so
- does not control another company other than qualifying subsidiaries
- is not controlled by another company, or does not have more than 50% of its shares owned by another company
- does not expect to close after completing a project or series of projects
Your company and any qualifying subsidiaries must:
- not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards
- have less than 250 full-time equivalent employees at the time the shares are issued
Your company must carry out a qualifying trade. If you’re part of a group, the majority of the group’s activities must be qualifying trades.
Limits on money raised
Your company cannot raise more than £5 million in total in any 12-month period from:
- Venture Capital Trusts (VCT)
- the Seed Enterprise Investment Scheme (SEIS)
- social investment tax relief (SITR)
- state aid approved under the risk finance guidelines – check with the person who gave you the aid for advice
Your company cannot raise more than £12 million from these sources in your company’s lifetime. This includes any money received by any subsidiaries, former subsidiaries or businesses you’ve acquired.
Limits on the age of your company
You can receive investment under EIS as long as it’s within 7 years of your company’s first commercial sale. If you have any subsidiaries (including former subsidiaries) or businesses you’ve acquired, the date of your first commercial sale is the earliest of the group.
If you received investment in this period (under EIS, SEIS, SITR, VCT or state aid approved under the risk finance guidelines), you can use EIS to raise money for the same activity as long as you showed you were planning to do so in your original business plan.
If you did not receive investment within the first 7 years, or now want to raise money for a different activity from a previous investment, you’ll have to show that the money:
- is required to enter a completely new product market or a new geographic market
- you’re seeking is at least 50% of your company’s average annual turnover for the last 5 years
Qualifying subsidiary companies
If your company owns or controls any other companies they need to be ‘qualifying subsidiaries’. This means:
- your company must own more than 50% of the subsidiary’s shares
- no one other than your company or one of its other qualifying subsidiaries can control this subsidiary
- there cannot be any arrangements which would put someone else in control of this subsidiary
The subsidiary must be at least 90% owned by your company where either the:
- business activity you’re going to spend the investment on is to be carried out by the qualifying subsidiary
- subsidiary’s business is mainly property or land management
The subsidiary can be set up to complete a project or series of projects before closing, as long as it supports the growth and development of your company.
Risk to capital condition
The investment in your company must meet the risk to capital condition, which means:
- your company must use the money for growth and development
- the investment should be a risk to the investors capital
Growth and development means you’ll use the investment to grow things like your revenue, customer base and number of employees.
The growth and development of your company should be permanent and not rely on the investor’s continued support.
The investment should carry a risk that the investor will lose more capital than they are likely to gain as a net return.
HMRC will not consider the maximum return an investor could get if your company is successful, because this cannot be guaranteed.
The net return includes:
- income from dividends, interest payments and other fees
- capital growth
- upfront tax relief
When deciding if you meet the risk to capital condition, HMRC will look at things like your company’s:
- sources of income
- use of subcontractors
- marketing of the investment opportunity
- relationship with other companies
You will not meet the risk to capital condition if there are risk reducing arrangements in place that result in an investor:
- getting priority over other investors
- being able to withdraw their money as soon as possible
- protecting their money so that other investors money is used first
When you issue shares
The shares you issue must be paid up in full, in cash, when they’re issued. Your company should have a way to accept payment before shares are issued.
Your shares for EIS investments must be full risk ordinary shares which:
- are not redeemable
- carry no special rights to your assets
The shares you issue can have limited preferential rights to dividends. However, the rights to receive dividends cannot be allowed to accumulate or allow the dividend to be varied.
When you issue the shares there cannot be an arrangement:
- to guarantee the investment or protect the investor from risk
- to sell the shares at the end of, or during the investment period
- to structure your activities to let an investor benefit in a way that’s not intended by the scheme
- for a reciprocal agreement where you invest back in an investor’s company to also gain tax relief
- to raise money for the purpose of tax avoidance – the investment must be for a genuine commercial reason
Before raising your money
Your investors will only be able to claim tax relief if you meet the conditions for EIS.
You can ask HMRC if your share issue is likely to qualify before you go ahead, this is called advance assurance.
How to apply
When you’ve issued your shares, you must complete a compliance statement (EIS1) and send it to HMRC.
Email HMRC to ask for this form in Welsh (Cymraeg).
If you’ve got advance assurance, provide copies of any documents that have changed since HMRC gave you advance assurance.
If you’ve not got advance assurance, you must provide the following information for your company and any subsidiaries:
- the business plan and financial forecasts
- a copy of the latest accounts
- an explanation of how you meet the risk to capital condition
- details of all trading and activities to be carries out, and how much you expect to spend on each activity
- an up to date copy of the memorandum and articles of association
- the information memorandum, prospectus or other document used to explain the fundraising proposal to your investors
- details of any other agreements between your company and the shareholder
- a list of the amounts, dates and venture capital schemes under which you’ve previously received investment
- any other documents to show you meet the qualifying conditions
You’ll also need to show evidence that you’re a knowledge intensive company if you’re applying as one.
You can only submit your compliance statement when you’ve carried out your qualifying business activity for 4 months. You must submit it within 2 years of this date, or within 2 years of the end of the tax year in which the shares were issued (whichever is later).
You must complete a separate application for each share issue.
What happens next
If your application is successful, HMRC will send you a letter and compliance certificates (form EIS3) to give to your investors.
The letter will include a unique investment reference number. You must include this on the compliance certificates you give to investors. Investors need the compliance certificate and reference number to be able to claim tax relief.
You must follow the scheme rules for at least 3 years after the investment is made – otherwise tax relief will be withdrawn from your investors. You must tell HMRC if you no longer meet the conditions within 60 days.
Where HMRC decides the investments do not meet EIS requirements, we’ll write to you explaining why. If you disagree, you can ask HMRC to review the decision, or appeal against it.
Source: HMRC gov.uk