Enterprise Investment Scheme – More SME business funding solutions

business-angelFollowing on from our recent article on the new Business Bank, this is the latest in a series explaining the various government schemes aimed at increasing the availability of funding to businesses in the UK.

Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is aimed at assisting smaller companies raise capital by offering a range of tax reliefs to potential investors.  This incentive is designed to help mitigate the additional risk for investors when making investments in smaller companies.

The Basics

Qualifying individuals and companies

The following are the basic rules.  For more detail see the link at the end of the article.

The individual

  • The investor may not have more than a 30% interest in the company
  • No partner or associate of the investor (including spouse, relations, prior business contacts) may have other interests in the company
  • The investor must not have any form of preferential shares
  • The investor must not have any other form of controlling interest in the company
  • This scheme must not be used for the purposes of evading tax

The company

  • The company must not have assets greater than £7 million
  • All capital employed must be actively engaged in the company within 24 months
  • The company must not be in specific industries
  • Entry into the scheme is subject to a decision and audit made by an appointed tax officer
  • The company must not be listed or have any intention of becoming listed at the time of the investment

The Investment

All shares must be paid up in full, in cash, when they are issued.

This is essential as one of the most common reasons for investments failing to qualify for relief under EIS is that shares are issued to investors without the company having received payment for them.

Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up. Shares may carry limited preferential rights to dividends.

Tax reliefs available

1. Income tax relief

For individuals only, who subscribe for (although this can be through a nominee) shares in an Enterprise Investment Scheme (EIS). Relief is at 30 per cent of the cost of the shares, to be set against the individual’s Income Tax liability for the tax year in which the investment was made.

Relief can be claimed up to a maximum  of £1,000,000 invested in such shares, giving a maximum tax reduction in any one year of £300,000 providing you have sufficient Income Tax liability to cover it.

In most cases the shares must be held for a period of three years from the date the shares were issued. However, if the qualifying trade started after the shares were issued; the period is three years from the date the trade actually started.

2. Capital Gains Tax exemption            

If you have received Income Tax relief on the cost of the shares, and the shares are disposed of after they have been held for the period referred to for the qualifying period any gain is free from Capital Gains Tax.

If no claim to income tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from capital gains.

3. Loss Relief 

Should the shares be disposed of at a loss, you can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

4. Capital Gains Tax deferral relief          

The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.

There are no minimum or maximum amounts for deferral. And it does not matter whether the investor is connected with the company or not. Unconnected investors may claim both Income Tax and capital gains deferral relief.

There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.

Please note that the budget on 22 June 2010 changed the rules such that it is no longer possible both to defer such gains under the EIS rules, and for them to qualify for Entrepreneur’s Relief. If you think that you may be affected by this you should seek advice before proceeding with investment under EIS.

Click here for more detailed information on any aspects of the scheme.

Finding alternative funding

If the continuing lack of availability of funding is affecting your business, please contact us.  We are specialists in this field and are would be happy to assist. 

As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.

Image by: Fernando Armaro Caamano