Which businesses are eligible for the scheme?

Under EIS, investors can invest in companies with up to 250 employees and gross assets of up to £15m. Companies are now able to take up to £5m of EIS-eligible investment a year. To enable an EIS scheme for your company, you need to take various steps including applying to HMRC for advance assurance that your company qualifies.

If the activity listed below is a substantial part of the company's activities (>20% or so) , it is unlikely to be eligible for EIS as these trades are specifically disqualified:

  • Dealing in land
  • Dealing in commodities, futures or (subject to exceptions for wholesaling and retailing) goods
  • Dealing in shares, securities or other financial instruments,
  • Banking, insurance, money lending, debt factoring, hire purchase financing or other financial activities
  • Leasing, including the letting of assets on hire
  • Receiving royalties or licence fees
  • Providing legal or accountancy services
  • Property development
  • Farming and market gardening
  • Activities concerned with forestry and timber production
  • Shipbuilding
  • Coal production and steel production
  • Operating or managing hotels and similar establishments (i.e. accommodation)
  • Operating or managing nursing homes and residential care homes
What rules are there for there for an investor to be eligible?
  • An investor must be an individual (i.e. not another company, or a VC etc)
  • The investor and their associates must have no ‘connection’ with the company e.g. employee or director, a close relative (except sibling) or spouse, or has more than 30% of the company.
  • The investor must subscribe in cash and be issued with new ordinary shares.
  • Investor shares must have no preferences e.g. over dividends.
  • The investor must have subscribed for the shares for genuine commercial reasons.
  • The investor has not exceeded the maximum annual EIS entitlement of £1 million.
Which tax reliefs are available under EIS?

Income tax relief – provided EIS qualifying shares are held for more than three years either from the date of issue, or commencement of trading, an individual with no more than a 30% equity share in the company can get income tax relief worth 30% of the amount invested. The minimum subscription is zero (from April 2012) and the maximum in respect of which a subscriber may obtain income tax relief in any year is £1 million.

CGT Relief – No capital gains tax is payable on disposal of the EIS shares after three years.

CGT Deferral Relief – capital gains tax payable on a different asset can be deferred by offsetting it against the share investment, where disposal of that other asset was less than three years before the EIS investment or less than one year after it.

Loss Relief – If EIS shares are disposed of at any time at a loss then the loss can be set against the investor’s capital gains, or his income in the year of disposal or the previous year.

Inheritance Tax Relief – Shares in EIS qualifying companies will generally qualify for Business Property Relief for Inheritance Tax purposes at rates of up to 100% after two years.

Can we use SEIS and EIS together?

The answer is 'yes'. The basic rules are that:

1. The first funding is done under SEIS (up to £150k).

2. The company can then use EIS to help raise further investment.

Note - a requirement that 70% of SEIS money had to be spent before EIS shares or securities can be issued was abolished from 6 April 2015.

What are some of the pitfalls around EIS?

It is essential that the detailed rules are followed or the company or investor could fall foul and lose the tax reliefs. Examples of where the strict EIS rules are not followed include:

  • Shares are not paid for in cash or are not fully paid up.
  • Issuing EIS certificates without having proper HMRC approval.
  • An individual cannot convert loans to the company into EIS shares.
  • The individual is appointed as a director before subscribing for shares and is therefore connected with the company (they can be a non-executive director after the investment is completed - but not an employee).
  • The individual must not have signed trading contracts on behalf of the company before he subscribes for his EIS shares. If he does then he would not qualify for EIS relief as he would have been previously involved in carrying on the company’s trade.
  • During the company’s three year relevant period there are arrangements in place where the company will, or even could, come under the control of another company even if these arrangements will not take effect until after the relevant period has passed.
  • Shares with preferential rights are created inadvertently, for example by issuing restricted shares to employees. The existing EIS shares would as a result have a preferential right that could be caught.
  • The shareholders’ agreement states that the EIS shareholders get their money back before another class of shareholders in the event of winding up.
  • The shares are not issued properly because the investor’s name has not been entered onto the register of members correctly or at all.
  • The share certificate has not been issued properly or at all.
  • There is a share reorganisation within the company which means that the “EIS shareholders” no longer qualify for EIS relief because they hold more than 30% of the ordinary share capital, even if this is only for a short period of time.
  • The company uses premises which are owned by an EIS shareholder or an associate. If the company pays more than market rent, the EIS shareholder is likely to ‘receive value’ from the company.