What is Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) is a UK government-led program designed to encourage investment in early-stage companies by facilitating venture capital funding and serving as a significant source of capital for these businesses while offering favorable tax treatments to the investors who support them.

To take advantage of the EIS, it is essential to ensure that the company meets the eligibility criteria and complies with the scheme's rules. When an early-stage business qualifies for EIS, as an investor, several tax reliefs alongside the investment can be claimed, including upfront income tax relief, tax-free capital gains and loss relief on each. On the other hand, the program also has an important role for startups to raise capital. Under this scheme, a business has a chance to raise up to £5 million annually, with a lifetime limit of £12 million.

Since its launch, over 53,000 eligible early-stage businesses have benefited from £30 billion in investment through the EIS. In the 2021-22 fiscal year alone, companies qualifying for EIS raised £2.3 billion.  

What’s The Purpose of this Scheme?

The government provides EIS tax reliefs to motivate people to invest in early-stage businesses with high-growth potential. It aims to support smaller companies, which can develop into successful enterprises, ultimately generating jobs and driving economic growth. In a nutshell, the scheme aims to mitigate the risks associated with investing in early-stage businesses by providing investors with generous tax incentives.

Companies must meet certain eligibility requirements to participate in the scheme. Also, there are certain conditions that must be met for investors too in order to benefit from the EIS. These eligibility rules play a crucial role in the sustainability of the investment because failing to comply with the rules of the scheme for at least three years after the investment has been made could have results such as tax reliefs being either withheld or withdrawn from investors.

Required Qualifications

There are certain requirements that investors and companies must meet before they can qualify for the scheme:

For the company:

·      It must be established in the UK

·      It must not be listed on a stock exchange when shares are issued

·      It must not be controlled by or have control over another company.

·      It should not plan to cease operations after completing any projects 

·      The gross assets of the participating company must not exceed £15 million before shares are issued.

·      It must employ fewer than 250 people

·      Capital raised through the EIS cannot exceed £5 million in a 12-month period, with a lifetime cap of £12 million, including funds from other government-sponsored venture capital schemes.

·      The funds generated from new shares must be used for a qualifying trade, preparation for a qualifying trade within two years of receiving the investment, or for research and development (R&D) aimed at leading to a qualifying trade.

·      Companies can only participate in the Enterprise Investment Scheme if it has been within seven years of their first commercial sale. In other words, they should not have been trading for more than seven years prior to raising its firs EIS finance.

For the investors:

·      They can’t be employees of the company

·      They can’t have a vested interest in the company

·      They can’t have any related investments in the company

·      There can not be any linked loans to the company

·      Shares must be held for at least three years.

·      They can only claim tax relief if the company completes a compliance statement. The company must also issue the investor form EIS3, which is a statement that confirms its status as a qualifying company.

Benefits For Investors and Companies 

Initially, investors can receive up to 30% income tax relief on their investments. If shares are held for three years, any gains made on their disposal can be exempt from capital gains tax too. Additionally, if the investments fail, they can offset their losses against their income tax. EIS investments may also qualify for relief from inheritance tax if held for a specific period of time. Furthermore, this scheme provides investors with the opportunity to diversify their portfolios by investing in early-stage companies which have high return and growth potential.

On the other hand, for startups, EIS provides easy access to funding while assuring investor confidence with scheme’s certification, enabling them to secure the financial resources necessary for their growth and development. The EIS certificate shows that the company meets certain criteria, which increases the confidence of potential investors as it makes them think their investments are less risky. More, after getting these funds from investors, they can be used in various areas such as product development, marketing, team expansion etc. In a nutshell, EIS not only provides capital generation for startups but also sets a sense of stability and confidence in the investment area while fostering innovation and entrepreneurship.

Author: Stj. Av. Deniz Yegin