30 Jun 2021
Small, rapidly scaling firms will help drive the recovery and they are increasingly turning to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) to help finance their growth.
But is EIS right for your funding needs? Early-stage businesses can find it difficult to secure investment from other sources such as banks, so EIS is designed to help unquoted companies raise equity finance by offering tax reliefs to investors. These reliefs are extremely generous to compensate investors for the added risks involved in backing small companies.
Several factors are making EIS more popular. Chancellor Rishi Sunak’s recent budget reforms are providing a boost to start-up companies, especially in the vital technology and life science sectors.
Many people made redundant or furloughed during the pandemic have had time to think about striking out alone and starting small businesses – they need funding.
The result is a wave of interest in raising money through EIS, with some scheme providers reporting several record months of growth in a row and predicting a continued upward trend this year and next.
But, while EIS can be a great way to fund your growth, its structure can be complex. This guide will help you stay within the rules and keep your investors happy.
EIS is one of four venture capital schemes available in the UK - the others are SEIS, Social Investment Tax Relief (SITR) and venture capital trusts (VCT).
EIS is for firms that have been trading for less than seven years and do not want to raise finance from other sources such as banks or venture capital.
It helps you raise money to grow by offering tax reliefs to individuals who buy new shares in your company.
Under the scheme, you can raise up to £5 million each year, and £12 million in your company’s lifetime, including amounts from other venture capital schemes.
There are different rules for some knowledge-intensive companies.
You must use money raised by your EIS share issue for a qualifying business activity; or preparing or researching such activity.
You must spend the money within two years of the investment, or if later, the date you started trading. You must use it to grow or develop your business, but not to buy all or part of another business, nor for any other purposes such as day to day working capital. There must be a risk to your investors’ capital with no risk reducing elements.
Your company can use EIS if it:
It must not have more than £15 million in gross assets, including subsidiaries, before you issue any shares, and not more than £16 million immediately afterwards. It must have under 250 full-time equivalent employees and must not be in financial difficulty.
Finally, EIS must not be used for tax avoidance - the investment must have a genuine commercial reason.
Some of the most complex rules are around investment timing.
You must receive the investment within seven years of your company’s first commercial sale, including any made by subsidiaries or acquired companies.
You must follow the scheme rules for at least three years after the investment, otherwise your investors will lose the tax reliefs.
If you received any venture capital investment in your first seven years, you can still raise EIS money for the same activity if you can show you intended this in your original business plan.
If you did not receive investment in the first seven years, or now want to raise money for a different activity, you’ll have to show that the money is required for a new product or geographic market; and is at least 50% of your company’s average annual turnover for the last five years.
Before offering EIS to investors, it is a good idea to apply for advance assurance from HMRC. This shows investors your company is eligible.
If you don’t have advance assurance, apply here.
If your application is successful, HMRC will send you a letter and compliance certificates to give to your investors.
After issuing shares, you will also need to complete a compliance statement within two years. You must tell HMRC within 60 days if you no longer meet EIS conditions.
The rules include a potential ‘sunset clause’ end date for EIS investment reliefs of April 2025. Although the government has recently made supportive comments about the scheme, and left its reliefs intact in recent budgets, there has been no firm commitment beyond this date.
The EIS Association says it is ‘fairly bullish’ the sunset clause will be removed, particularly now EU state aid has fallen away, post-Brexit.
However, it still makes sense to make the best of EIS while you can - just be careful to stay within the rules.
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