What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a government-driven initiative designed to stimulate investment in early-stage businesses through venture capital.

It serves as a significant source of capital for these companies while also providing attractive tax reliefs to the investors who support them.

In this article we’ll explain what the EIS is, what businesses are eligible, and how to apply.

As with all financial decisions, it’s a good idea to seek independent and specialist financial advice to check that a financial product is right for your business and its circumstances.

What is the Enterprise Investment Scheme (EIS)?

Introduced in 1994, the EIS is a program that provides tax benefits to individual investors who purchase new shares in a company.

This scheme can make a company more attractive to investors, enabling it to raise funds and expand its business operations.

Under this scheme, a business can raise up to £5 million annually, with a lifetime limit of £12 million.

It's important to note that these limits include amounts received from other venture capital schemes, provided the initial investment was made within seven years of the company's first commercial sale.

To take advantage of the EIS, it's crucial to ensure your company is eligible for the scheme and abides by its rules.

This ensures that your investors can claim and retain the tax reliefs associated with their shares under the EIS.

Failure to abide by the rules of the scheme for at least three years after the investment has been made could result in tax reliefs being either withheld or withdrawn from investors.

What companies are eligible for the EIS?

The EIS has specific guidelines that companies must adhere to, which are detailed on the Gov.uk website.

The key rules include that the company:

• must not be listed on the London Stock Exchange or any other recognised stock exchange. Notably, companies that are listed on AIM and the Aquis Stock Exchange aren't considered quoted
• should not be under the control of another company
• can't control any non-qualifying subsidiaries. A qualifying subsidiary is one where over 50% of the shares are held by the parent company, and it's not controlled by another company. However, if EIS funds are applied, the subsidiary must be at least 90% owned, as should a property managing subsidiary
• has gross assets that do not exceed £15 million before the EIS share issue or £16 million immediately after the share issue
• at the time the shares are issued, has fewer than 250 full-time employees (or their equivalents)
• must have a 'permanent establishment' in the UK (effective from 6th April 2011)
• can't raise more than £5 million of state aid risk finance, including EIS, in any twelve-month period, or a total of £12 million
• should not have been trading for more than seven years prior to raising its first EIS finance.

These rules, especially those regarding control by another company, qualifying subsidiaries, and the company carrying on trade, must be adhered to throughout the three-year EIS qualifying period.

If these conditions aren't met, the investors could lose their reliefs.

Finally, the funds raised must be used for the growth and development of the business, not for acquiring a trade or business, certain intangible assets, or shares in another company.

It’s worth noting that there are different eligibility criteria if your company can be defined as knowledge intensive.

What is a knowledge-intensive company?

For the purposes of the EIS, a knowledge-intensive company is defined as:

• having less than 500 employees at the time shares are issued
• is conducting work that will create intellectual property and foresees that this intellectual property will generate the majority of the company’s business over the next ten years
• having 20% of the company’s employees engaging in research for a period of at least three years from the date of investment. These employees need to have either a relevant Masters degree or higher degree to qualify.

Knowledge-intensive companies and the EIS

If your company is knowledge-intensive and conducts a large amount of research, development, or innovation, then you can still apply for the EIS scheme and the eligibility criteria are relaxed.

Knowledge-intensive companies are still eligible for the EIS even if:

• They need to raise more money than the usual scheme permits (£12 million lifetime)
• Their company is older than the scheme usually allows (seven years)
• The investor is seeking to make use of higher investor limits.

To qualify for the EIS as a knowledge-intensive company, the applicant must be conducting research, development, or innovation at the time it issues shares and:

• the company’s first commercial sale and annual turnover exceeding £200,000 occurred less than ten years ago
• the amount of investment the company wants to attract is over the limit of the normal EIS scheme but below the limit for a knowledge-intensive company (£10 million per year and £20 million across the lifetime of the company and any of its subsidiaries)
• otherwise meets the eligibility criteria of the EIS scheme.

What types of business are eligible for the EIS?

Most trades can qualify for EIS but there are some exceptions as listed on the Gov.uk website.

While certain trades are explicitly ineligible for the EIS, such as property, there are other business activities that may qualify even if they initially seem like they wouldn't.

If you're uncertain about your company's eligibility, it's advisable to consult with an experienced professional.

Moreover, a company can engage in some ineligible activities under the scheme but, these cannot constitute a 'substantial' portion of the company's trade.

According to HMRC guidelines, 'substantial' is defined as more than 20% of the company's trading activities.

Therefore, it's crucial to ensure that any excluded activities your company undertakes do not exceed this threshold.

How does a company take part in the EIS?

Before you begin your share issue it’s a good idea to speak with HMRC to make sure that your business qualifies for the EIS, this is called advance assurance.

After this you can apply with a compliance statement.

A compliance statement can be submitted to HMRC if you hold one of the following roles in a company:

• Company Secretary
• Director
• Agent

If you are unable to submit the statement yourself, you could authorise an agent to apply on your behalf.

The agent will need to provide a letter, signed and dated within the last three months, confirming their authorisation to act on your behalf.

The process to complete this includes the following steps:

1. Issue your shares
2. Fill out a compliance statement (EIS1)
3. Send the completed EIS1 form to HMRC.

If you have obtained advance assurance from HMRC, it is important to provide copies of any documents that been changed since the assurance was granted.

For companies that have not received advance assurance, a comprehensive set of information is required for both your company and any subsidiaries. This includes:

• the business plan and financial forecasts
• a copy of the most recent accounts
• an explanation of how the risk to capital condition is met. This means that your company should aim to grow in the long term and that the investment should be a risk to the investors’ capital
• details of all trading and activities planned, including projected expenditure on each activity
• an up-to-date copy of the memorandum and articles of association
• the information memorandum, prospectus, or other documents used to outline the fundraising proposal to investors
• details of any agreements between your company and the shareholder
• a list of amounts, dates, and venture capital schemes from which previous investment was received
• any other documents needed to demonstrate that you meet the qualifying conditions.

If you are applying as a knowledge-intensive company, you will also need to provide evidence to HMRC to support this claim.

You can only submit your compliance statement after you have engaged in your qualifying business activity for four months.

The submission must be made within two years of this date, or within two years of the end of the tax year in which the shares were issued, whichever comes later.

A new compliance statement must be completed for each share issuance.

Please note, once shares are issued under the EIS, the company is no longer able to issue shares under the Seed Enterprise Investment Scheme.

Can I combine the EIS with other schemes?

You can take advantage of the EIS alongside other forms of funding.

However, under UK tax relief schemes, in any given 12-month period, a company is restricted to raising a maximum of £5 million in total from the following sources:

• Enterprise Investment Scheme (EIS)
• Venture Capital Trusts (VCT)
• Seed Enterprise Investment Scheme (SEIS)
• Social Investment Tax Relief (SITR)
• State aid approved under risk finance guidelines. For advice on this, consult with the individual or organisation that provided the aid.

Additionally, there is a lifetime limit for your company, which cannot exceed £12 million from these sources.

It's important to note that this limit includes funds received by any current or former subsidiaries, as well as businesses your company has acquired.

For more information on EIS, see HMRC’s Venture Capital Schemes Manual.