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The Enterprise Investment Scheme (EIS) is a government initiative designed to encourage private investment in small, high-risk businesses by offering significant tax reliefs to investors.
For London entrepreneurs, EIS can be a powerful tool to attract investment and support business growth.
In this brief guide, we will provide an in-depth look at EIS, including eligibility criteria, benefits, and the application process.
We’ll also highlight how EIS can help your business attract investors and achieve its growth potential.
Understanding the Enterprise Investment Scheme (EIS)
EIS was introduced by the UK government in 1994 to stimulate investment in small, high-risk companies by offering attractive tax reliefs to investors. The scheme aims to help these businesses raise capital by reducing the financial risk for investors.
Eligibility Criteria: Enterprise Investment Scheme (EIS)
To qualify for EIS, both the company seeking investment and the investors must meet certain criteria.
Company Eligibility:
- Trading Status: The company must be a UK-based trading company engaged in qualifying business activities. Excluded activities include financial services, property development, and energy generation.
- Size and Age: The company must have fewer than 250 full-time employees and gross assets of less than £15 million before investment and £16 million after. Additionally, the company must be less than 7 years old from its first commercial sale.
- Funds Usage: The raised funds must be used for growth and development purposes and cannot be used for certain prohibited activities like purchasing existing shares.
Investor Eligibility:
- Residency: Investors must be UK taxpayers to benefit from EIS tax reliefs.
- Investment Limits: Investors can invest up to £1 million per tax year, or £2 million if the investment is in knowledge-intensive companies.
- Non-Connection: Investors cannot be employees or hold significant stakes in the company they are investing in.
Example: A tech startup in London developing an innovative app meets the criteria for EIS, as it is engaged in qualifying activities, has fewer than 250 employees, and is seeking funds for product development.
Benefits of Enterprise Investment Scheme (EIS)
EIS offers a range of tax reliefs that make it highly attractive to investors. These include:
- Income Tax Relief: Investors can claim 30% of the cost of their EIS shares as a deduction from their income tax liability for the tax year in which the investment is made, up to a maximum of £300,000.
- Capital Gains Tax (CGT) Exemption: Any gains on EIS shares are exempt from CGT if the shares are held for at least three years.
- Loss Relief: If the EIS shares are sold at a loss, investors can offset the loss against their income tax.
- Capital Gains Deferral: Investors can defer CGT on other assets by investing the gains in EIS shares.
Example: An investor places £50,000 in a qualifying EIS company. They can claim £15,000 (30%) in income tax relief, reducing their income tax bill for the year. If the investment grows, any gains made after three years are free from CGT.
EIS Application Process
The application process for EIS can seem complex, but following these steps can help ensure a smooth process:
- Advance Assurance: Before seeking investments, companies can apply for Advance Assurance from HMRC. This provides confirmation that the company is likely to qualify for EIS, making it more attractive to potential investors.
- Issue Shares: Once Advance Assurance is obtained, the company can issue EIS shares to investors. Ensure all shares are paid in full, in cash, and that the correct procedures are followed.
- Submit EIS1 Form: After raising the funds and spending at least 70% on qualifying business activities, the company submits an EIS1 form to HMRC to receive EIS3 certificates.
- Provide EIS3 Certificates: HMRC will issue EIS3 certificates, which the company then distributes to investors. Investors use these certificates to claim their tax reliefs.
Example: A London-based renewable energy startup applies for Advance Assurance, receives positive feedback, issues shares, and submits the EIS1 form. Once the funds are appropriately utilised, the startup distributes EIS3 certificates to its investors.
Attracting Investors with EIS
EIS can significantly enhance a company’s attractiveness to potential investors by mitigating investment risks through substantial tax reliefs. Here’s how you can leverage EIS to attract investors:
- Highlight Tax Benefits: Clearly communicate the tax advantages of EIS to potential investors. Emphasise the 30% income tax relief, CGT exemption, loss relief, and CGT deferral benefits.
- Advance Assurance: Obtain Advance Assurance from HMRC before approaching investors. This provides credibility and assurance that the company qualifies for EIS.
- Investment Readiness: Ensure your business plan, financial projections, and market analysis are robust. Demonstrating a clear growth strategy and how the investment will be used to achieve it can reassure investors.
- Transparency: Maintain transparency about your business operations, financial health, and compliance with EIS requirements. Investors need confidence in your management and strategic direction.
Example: An AI-driven fintech startup in London uses EIS to attract investors by highlighting the tax relief benefits and securing Advance Assurance. The detailed business plan and clear growth strategy further convince investors of the potential returns.
Conclusion
The Enterprise Investment Scheme (EIS) is a valuable tool for London entrepreneurs seeking to attract investment and support business growth. By understanding the eligibility criteria, benefits, and application process, businesses can leverage EIS to mitigate investment risks and appeal to potential investors. With careful planning and strategic use of EIS, your business can secure the funding needed to innovate and expand.
At Adroit, we specialise in guiding London entrepreneurs through the EIS process. Contact us today to book your free consultation and learn how we can help your business attract investors and achieve its growth potential.gov.
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For more information on EIS, check out GOV.UK: Enterprise Investment Scheme (EIS)
Let us assist you in navigating the complexities of EIS and securing the investment needed for your business’s success.