Enterprise Investment Scheme EIS Compliance: The Complete Guide (2024)

The Enterprise Investment Scheme (EIS) is an excellent tool that is used to attract potential investors and to speed up the growth of early-stage companies. The process, however, requires a substantial amount of paperwork and documentation that comes along with a plethora of EIS-specific terminology! Fear not; our EIS accounting experts have curated a one-of-a-kind comprehensive EIS compliance guide that will help you comprehend the fundamentals without getting too confused about the technicalities.

What is EIS?

The Enterprise Investment Scheme (EIS) has been set up to encourage economic growth by offering tax breaks to investors who put money into innovative, riskier, younger companies. It enables startups or high-risk businesses to raise the funds required for expansion and development. Companies must first fulfill specific requirements to benefit from the scheme, and any funds collected must be put toward authorised use cases. Always speak to your Accountancy Provider for the specifics that fit your needs.

EIS vs. SEIS: What’s the Difference?

Companies that are slightly more established compared to a startup with up to 250 employees are eligible for the Enterprise Investment Scheme, whereas, on the other hand, early-stage businesses with fewer than two years of commercial activity and 25 employees are the focus of the Seed Enterprise Investment Scheme (SEIS).

The EIS eligibility criteria are relatively straightforward as this is specifically designed for medium-sized businesses. To qualify, a Company must meet the following criteria:

• The company must be established in the UK
• It should have under 250 employees
• The gross assets of the company need to be under £15 million
• It should have started trading less than 7 years ago; this is important unless the company qualifies for Knowledge Intensive Company. Moreover, this only applies for the first time when a company raises funds through EIS
• It is not be listed on a stock exchange
• The company should not be owned by or controlled by another company

For each tax year, an individual investor (i.e., not a company) may contribute up to £200,000 to a SEIS-approved business, and a SEIS company can raise a maximum of £250,000 in total SEIS capital.

What is Advance Assurance for EIS?

When a company believes it is eligible for EIS (Enterprise Investment Scheme), it can apply for what is known as Advanced Assurance. The assurance can be useful when speaking to investors as it assures them that their investment would be eligible for the EIS tax relief.

The process itself entails applying to HMRC through an application form; HMRC then verifies if a company is qualified for the EIS relief based on its eligibility criteria. During the process, the company answers questions about the company, its business plan, and the investment that is being raised in question.

The advanced assurance process is not obligatory, but obtaining it can be very advantageous, especially towards the fundraising process and providing added investors, which makes the company investment seem less risky and more tax efficient. In fact, many investors prefer a company that has been preapproved for SEIS/EIS over a company that has not, as it guarantees tax benefits for them.

The advanced assurance is only an assurance towards the eligibility of the company for EIS and not the individual investor, who is responsible for ensuring their own compliance with the scheme to claim tax relief on their investment.

The EIS Advance Assurance that a business receives from HMRC is perpetual. However, the company’s advanced assurance could be void if circ*mstances change between the time of application and the issue of shares.

EIS Examples

History of EIS (Enterprise Investment Scheme)

The United Kingdom government launched the Enterprise Investment Scheme in 1994. In January 1999, the government implemented a program based on capital gains tax relief. Over the years, the program has experienced several modifications, one of which is the definition of a qualifying trade.

The government of the United Kingdom oversees three venture capital schemes, including the EIS. The other two are the Social Investment Tax Relief Scheme (which is closed to new investments as of April 6, 2023) and the Seed Enterprise Investment Scheme. Additionally, investors can place their money in the Venture Capital Trust, which disburses funds to eligible businesses. These programs give investors tax breaks while enabling small and medium-sized enterprises to raise cash and boost the economy.

Find out which investment relief is the most suitable for you.

How Does EIS Work?

The Enterprise Investment Scheme:

• Provides tax breaks to investors who purchase new shares in an EIS-eligible company
• Aids in fundraising for business expansion up to £5 million annually and a maximum of £12 million throughout your company’s lifetime.

If the original investment is made within seven years of your company’s first commercial sale, the above-mentioned limitations apply to the amounts you receive from other venture capital schemes. To ensure that your investors can claim and retain the tax benefits associated with their shares under the Enterprise Investment program, you must confirm that you are able to use the program and adhere to its requirements. The rules can be slightly different for KICs and NKICs.

Knowledge Intensive Companies (KICs)

If you are applying as a knowledge-intensive company (KIC) for the Enterprise Investment Scheme (EIS), you might be eligible for certain additional benefits. KICs are business entities prioritising innovation, research, and development, known as knowledge-intensive companies or KICs.

A business might want to be eligible to be a KIC for several reasons:

• The larger annual investment amounts are sought after by investors.
• The investment is being requested from an EIS knowledge-intensive fund that is HMRC-approved.
• The business employs more than 250 people or is older than the maximum allowed limit of seven years.
• The business wants to raise more money than can be acquired under EIS

Whatever the reason, you must present proof of your KIC status. Your proof needs to specify which KI requirements the business satisfies and how.

Qualifying Companies

To qualify for EIS, companies must fulfill the criteria for share issuance over the next three years.

1. Gross Assets: The company’s gross assets must not exceed a certain threshold immediately after the share issuance.
2. Employee Count: The company should have fewer than 250 full-time equivalent employees.
3. Stock Exchange Listing: The company should be unquoted or listed on AIM and have plans to get quoted on a recognized stock exchange.
4. Autonomy: The company must be independent, not controlled by another business.
5. Eligible Transactions: The company must engage in eligible transactions as defined by EIS regulations.
6. Permanent Establishment in the UK: The company must have a permanent establishment in the UK.
7. Anti-Avoidance Rules: There are specific anti-avoidance regulations to prevent certain schemes that reduce investor risk.

Following the shares’ issuance, the business needs to make sure that:

• The gross assets do not exceed a certain threshold immediately after the share issue, the current threshold is no more than £16 million after the share issue and £15 million right before the share issue.
• The company should have less than 250 “full-time” employees.
• It should be an unquoted company.

The following requirements must be met by the business both during and for the three years following the share issue:

• Be autonomous, that is, not governed by another business.
• Make an eligible transaction.
• Possess a “permanent establishment” in the UK, even though it is no longer necessary to trade primarily in the UK.

Anti-avoidance regulations exist to combat planned withdrawals and other arrangements to lower an investor’s risk. The funds raised through a new share issue under an EIS should be used for a qualifying business activity. The funds must be used within 2 years of the investment and should be used to grow or develop the business. The funds cannot be used to buy the shares of another business or part of another business.

The shares issued to EIS investors must be full risk, non-cumulative fixed preference shares, or ordinary shares. There must not be “no protection” offered to investors to avoid risk, and no linked loans are allowed.

The no loan rule applies from the company incorporation date until three years after the share issuance date. Even if the shares are issued more than two years after the date of incorporation of the company, the start date for the no-loan rule will be at the date of company incorporation until the third anniversary of the share issue.

Investors Requirements

Investors are not required to be UK residents to claim EIS, though to claim income tax relief, an investor must have the income source liable to UK income tax. Investors must not have a substantial interest in the company. Substantial interest refers to having the possession (directly or indirectly) or the entitlement to acquire more than a 30% stake in the company, including shareholdings of associates.

Other EIS rules for investors are as follows:

• The investor or any of their associates cannot be an employee of the company they are investing in but can be a company director. Unpaid directors are eligible for the EIS relief, but there are special situations where a paid director can also be eligible for the EIS.
• Trustees, spouses, civil partners, parents, kids, and other family members—aside from brothers and sisters—are regarded as “associates” in business partnerships.
• To be eligible for the EIS, the investment must be a maximum of £1 million per tax year; this limit may increase to £2 million only if half of that £1 million is invested in Knowledge Intensive Companies.
• The investment must not be made to avoid taxes and should only be made for commercial reasons.
• The investor must keep the shares for at least three years, or the EIS relief can be withdrawn or reduced.
• The shares must be paid upfront to receive the full EIS tax benefits, and the issues must be ordinary shares.
• The investor must not get any value from the company they invested in for three years, or the relief can be withdrawn or reduced. The value here refers to the company repaying, repurchasing, or redeeming any of its share capital belongings or any debt owed to the investor or the company providing any benefits to the investor.

Which Sectors Are Eligible and Which Are Excluded?

EIS is available for most industries, like other incentives available to the companies, but not all sectors are equal in numbers when it comes to getting approval. In 2020-2021, the top sectors “Information and Communication,” “Professional Scientific and Technical Sector,” “Manufacturing sector,” and “the wholesale and retail trade and repairs” collectively accounted for £1,194 million of investments and made up 71% of all EIS investment. The data in terms of trends remained similar to 2019-2020 data.

Other sectors listed in the official HMRC report include:

• Agriculture, Forestry, and Fishing
• Mining and Quarrying
• Electricity, Gas, Steam, and Air Conditioning
• Water, Sewerage, and Waste
• Construction
• Transport and Storage
• Accommodation and Food
• Financial and Insurance
• Real Estate
• Admin and Support Services
• Public Admin, Defence, and Social Services
• Education
• Health and Social Work
• Arts, Entertainment, and Recreation,
• Other services activities
• Households
• Overseas

Excluded sectors are:

• Money lending, insurance, and banking
• Production of steel and coal
• Trading in products not often offered at retail or wholesale, such as products kept as investments while stock isn’t actively sold.
• Trading in securities, financial products, land, commodities, or futures; also trading in stocks, shares, and securities
• Market gardening and farming
• We produce or export energy, with a few notable exceptions (anaerobic digestion, hydropower, community interest corporations, and cooperatives).
• Finance related to hire-purchase agreements and other matters.
• Leasing or hiring out assets, except ship chartering
• Accounting or legal services
• Real estate development
• Getting royalties or licensing payments, while there are notable exceptions for intellectual property that is created independently
• Managing lodging facilities or any other properties of a comparable nature
• Managing residential care facilities
• Building ships

A company will not be eligible for EIS investment if the above-mentioned business sectors represent more than 20% of its daily operations.

What you need to do Before Investing

When selecting the best EIS investment, investors should consider several crucial factors.

Consult With a Financial Expert

Since every investor is unique, their willingness to take on risk varies depending on their situation. Investors must seek the advice of a financial advisor to identify an EIS investment that aligns with their investing objectives and financial constraints.

Select The Right Investment Manager

An investor should assess the EIS manager’s track record of selecting and funding smaller enterprises if they are thinking about investing in a portfolio of EIS-qualifying companies. (But remember that past results do not guarantee future profits.)

Also, the time it takes to sell EIS shares will depend on when they were purchased and when the chance arises (this could take up to 10 years or more). Selecting an EIS manager with a solid track record of offering feasible possibilities may be worthwhile.

Verify The Costs

It is recommended that investors review the fees of the EIS portfolio service they are considering and contrast them with the fees charged by other EIS managers.

Benefits of EIS

The following are some of the advantages of investing in EIS:

• High growth potential investments: early-stage companies can expand and grow more quickly than more rigidly structured larger organisations
• Tax breaks to help reduce some of the monetary risks associated with investing in EIS
• To Make a positive impact on the economy of the future by funding creative and aspirational businesses that frequently approach problems in novel ways
• Benefits of tax planning: EIS investments enable high earners and individuals with higher tax responsibilities to use them to lower their overall tax burden

Tax Benefits of EIS

The primary benefit of the scheme, as perceived by investors, is the tax incentives provided to incentivise investments in eligible companies.

Income Tax

As an investor, you may claim up to 30% EIS investment relief to mitigate the risk of investing in startups and small businesses. However, you may only be able to claim relief on up to £ 1 Million of investment in a single tax year, this amount can be increased to £2 million provided that any amount over £1 million is invested in knowledge-intensive companies.

CGT Deferral:

Capital Gains Tax deferral demands reinvestment of the sum of the gains for it to be deferred. The maximum gain is £ 2 million, on which you can claim the deferral relief.

Loss Relief

Investors can use loss relief to deduct losses on EIS companies against their income tax or capital gains tax obligation. The realized value of an investment must have been reduced to a lesser amount than what is referred to as the “effective cost” to be eligible for loss relief.

The straightforward calculation to determine effective cost is:

The amount invested – The income tax relief claimed from the EIS investment = Effective Cost

If you have invested £100,000 while claiming 30% of income tax relief, which is £30,000, the effective cost you can receive £70,000 as your effective cost.

Risks Involved in EIS Investment

You can receive less money than you invested since, like other investments, its value and income can decrease and increase.However, compared to other investments, this risk is higher with the EIS because they fund startups. Small businesses are more unpredictable and prone to failure than their larger counterparts. Consequently, you can lose everything you invest.

EIS investments are, therefore, long-term investments and are not suitable for all investors. Investors who are more confident in risk management can tolerate the losses, or individuals who do not require liquidity can opt for it as well.

The company’s qualifying status must be maintained, and you must hold the investment for at least three years to retain all possible tax reliefs. If not, you can be required to repay the income tax relief that you were granted.

How to Submit EIS Compliance Statement

Issuing your investors SEIS/EIS compliance certificates is necessary so they can receive their tax benefits after your funding round is complete and shares have been issued.

• Fill out and submit the EIS1 compliance statement and any supporting documentation.
• Get the EIS2 form from HMRC, which certifies your company’s compliance.
• Provide investors with EIS3 compliance certificates so they may claim their tax savings.

How do you apply for the EIS?

An EIS compliance statement can be submitted if you are:

• An agent,
• The director,
• The corporate secretary

An agent, such as an Accounting Firm in London or anywhere else in the UK, maybe appointed on your behalf. A signed letter dated within the last three months will be required to verify their authority to act on your behalf.

You should:

1. Distribute your shares
2. Fill out an EIS1 form (compliance statement)
3. Forward to HMRC

If you have advance assurance, you should submit copies of any updated documentation you received from HMRC.

If you don’t have advance assurance, your business and its subsidiaries must have the following data:

• The financial forecasts and the company plan
• An updated copy of the accounts
• A description of all trade and activity specifics, including how you plan to meet the risk to capital condition and how much you are planning to spend on each business activity
• A current copy of the Article of Association and Memorandum
• The information memorandum, prospectus, or other document that your investors are given to understand the fundraising project
• Information about any additional agreements your business may have with the shareholder
• A record of the amount, dates, and venture capital programs that the company has been funded under in the past, together with any further documentation proving your eligibility

Speak to our Personal Tax Accountants if you want to outsource the complexities of the process to us.

In addition, if you are applying to a knowledge-intensive organization, you must provide proof of this.

Submitting your EIS compliance statement depends on completing four months of qualifying business activity. It must be filed within two years of this date or, if that is later, within two years of the end of the tax year in which the shares were issued.

For every share issue, a new statement needs to be completed. You must utilise the Compliance Statement form SEIS1 for the shares to be recognised as issued under the Seed Enterprise Investment Scheme (SEIS). The company cannot issue shares under the Seed Enterprise Investment Scheme once shares have been issued under the Enterprise Investment Scheme.

FAQs

Jibran Qureshi

Managing Director

+44 (0)207 117 2639

info@chacc.co.uk

chacc.co.uk

Author Bio

Jibran Qureshi FCCA is the Managing Director of Clear House Accountants and has over 13 years of experience in practice across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guides his cognizant approach to leading Clear House and its clients to the future. This dexterity led him to be Enterprise Nation’s Top 50 Advisors. Jibran recognised the need to manage the innovative disruptions sustainably early on and shaped Clear House Accountants not just to be compliance specialists but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.

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