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EIS scheme explained in 6 steps

by | Jan 26, 2021 | EIS

Unlike the SEIS, the EIS Scheme was developed by HM Revenue and Customs (HMRC) in the 1990s to initially help small businesses. However, the Enterprise Investment Scheme (EIS) evolved into an investment scheme that can only be implemented by larger companies.

Most of the companies that qualify for the EIS are private sector companies and represent a higher financial risk when investing. For those companies that are starting up and estimate stable long-term capital growth, they are the most interested in qualifying for the EIS, as they have a larger amount of assets than companies applying for the SEIS.

EIS is a Scheme from HMRC

The Enterprise Investment Scheme (EIS) relies heavily on the HMRC as it is the only government-endorsed institution to process and approve EIS applications. In many cases, before investing, investors prefer to work with companies that have been certified by the HMRC to benefit from the EIS.

Regardless of the investment scheme, this certification is known as Advanced Assurance, and the HMRC usually takes between 2 to 6 weeks to pass the certification that companies need to use the EIS Scheme. It is a practical way for investors to protect themselves from certain risks.

How EIS Works?

The EIS scheme was designed to enable companies to obtain funding from investors in return for offering attractive tax breaks for all investors holding shares in the company. This kind of investment scheme can only be implemented in companies with high financial risk.

For a company to qualify for the Enterprise Investment Scheme (EIS), certain requirements must be met.

  • The company must have a maximum of 7 years in operation.
  • Companies can receive a maximum investment of £12 million, and a maximum of £5 million per year.
  • The company cannot exceed 250 employees.
  • The company may not hold assets above £15 million before issuing the shares. Nor may it hold assets above £16 million, after the issue of the shares.
  • The company must be independent. This means that it cannot belong to another company or control other smaller companies.

As you may have noticed, the Enterprise Investment Scheme (EIS) is ideal for companies that have problems raising funds to grow financially and operationally, especially when it comes to foreign investors.

Benefits of EIS

There are currently two ways to invest in the EIS Scheme. Investors can either invest directly in the company or invest through a mutual fund which creates portfolios for investors.

Once a company qualifies for EIS, investors can benefit from certain attributes.

  • Investors can receive a tax break of 30% on the amount invested.
  • Investors have the opportunity to receive “loss relief”.
  • According to the government’s latest update, investors can only invest a maximum of £2 million in a fiscal year. However, if the investment is held for 3 years, investors can retain “loss relief”.
  • Investors also receive a 100% tax relief on capital gains.
  • Investors can receive an inheritance tax deduction, which is 100%, but this claim can only be processed after holding shares for two years.
  • They obtain tax-free financial growth.
  • They receive deferrals of capital gains.

Investors who invest directly in the company have greater control over the company’s financial and administrative operations. However, the risk is much greater because the company depends solely on its capital. In the case of investing through an investment fund, the investors have no control but only invest through professional advisors who analyze the opportunities and make the best decisions in the investors’ stead.

Tax Reliefs

The EIS tax relief was designed to enable younger, high-risk companies to grow operationally and financially. If investors choose to invest the maximum of £2 million in the tax year, at least 50% of this investment must be for knowledge-intensive purposes.

Besides, investors must hold their shares for a maximum of 3 years to recover any tax relief. Because income tax rates are higher than capital tax rates, investors usually claim at least a 50% exemption.

Rules for tax relief

For investors to benefit from the EIS tax relief, they must abide by certain rules that were developed by the government and HMRC.

  • Investors cannot transfer their tax relief in any way.
  • Investors must be UK taxpayers.
  • Investors must fulfill their obligation to buy the new shares that the company issues to the market.
  • Finally, the inverters cannot have any connection with the company. This means that the investors cannot be employees, partners, or a paid manager of the company.

For investors to benefit from the tax relief and other benefits of the EIS Scheme, they must comply with these strict rules. Besides, as mentioned above, investors cannot invest more than £2 million in any one tax year and must hold their shares for at least 3 years.

EIS scheme application

For a company to apply for the EIS Scheme, it must operate in specific industries. This is called a “Qualified Operation”, and if the company does not operate within these legislated industries, it cannot qualify for the EIS.

  • Companies may not operate land or stock businesses.
  • They can only operate in retail or wholesale businesses.
  • They may not participate in activities such as selling insurance, lending money, or bank-related financial activities.
  • Nor may they participate in leasing or asset renting activities, except for certain tasks.
  • They cannot participate in the real estate industry, agriculture, accounting, steel and coal production, or even shipbuilding.

In 2018, approvals of EIS Scheme applications doubled. Knowledge-intensive companies benefited from updates developed by the government and the HMRC. Even companies founded abroad, but with a qualified agent in the UK, can apply for the EIS.

This can be seen as an advantage for companies seeking investment from foreign investors, a task that is often very complex when it comes to convincing investors to raise financial funds. Finally, it is important to remember that companies can only apply for the EIS Scheme if they know and provide all relevant details of their investors. This is the only way for HMRC to approve the EIS application.

Image credits: Infographic vector created by dooder – www.freepik.com

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