Introduction
As a contractor who runs your own company, you may wish to maximise your personal savings. The HMRC Enterprise Investment Scheme (EIS) is a type of Venture Capital Trust (VCT) scheme. In the UK, many individuals may decide to invest in one or more of these. This includes limited company contractors as well as other business owners and UK individuals. When a UK contracting professional invests in EIS, HMRC allows them to claim tax relief on the investments via their tax return, if they meet the EISeligibility rules. Indeed, the tax relief itself is up to 30% against their overall income tax bill. In this short guide we’ll research what is EIS tax relief (HMRC) and how the scheme works. Besides EIS income tax relief, we’ll investigate HMRC EISeligibility and the EIS tax benefits.
EIS investments were introduced in 1994. The scheme has a range of tax benefits for individuals, in return for becoming a shareholder. What’s more, the types of companies which offer EIS investment opportunities are early-stage businesses. Therefore, the investments into these new companies are high risk. If you’re thinking about investing, you should look for an EIS investment opportunity. There’s plenty of guides and helpful information online regarding advice from websites who specialise in these types of investments.
In this guide, we’ll look at HMRC EIS guidance and discover the Enterprise Investment Scheme tax benefits. We’ll research the EIS scheme requirements, the official rules and claiming tax relief on EIS investment (UK). Before you invest, it’s good to be aware of how the income tax relief under the scheme works. Therefore, if you’re looking to benefit from some EIS tax breaks, it’s good to know how the rules work first.
Initial thoughts
What are VCT schemes?
In general, Venture Capital Schemes (VCT), of which EIS (UK) is one, offer tax relief to UK individuals (not companies). These schemes encourage individuals to invest in companies and social enterprises. In return, they receive Enterprise Investment Scheme tax relief. What’s more, these companies and enterprises aren’t on any recognised stock exchange. Therefore, the schemes available which you can take part in are:
- Enterprise Investment Scheme (EIS).
- Seed Enterprise Investment Scheme (SEIS).
- Social Investment Tax Relief (SITR).
An individual can invest in one or more of these schemes in the UK. As a result, they’ll receive tax relief against their UK income tax bill.
Contractors & individuals who invest in VCT schemes
As a limited company contractor or individual how do VCT schemes work? Basically, you can personally invest directly in a company or enterprise that qualifies for one of these schemes. What’s more, the types of business which offer EIS opportunities are often knowledge intensive companies (KIC). Also, to qualify for the scheme, they must operate a qualifying trade. There’s more on the HMRC website with regards to what are EIS qualifying companies, how to meet the eligibility criteria and how to apply for this. To sum up, it’s key to note investing into EIS qualifying shares in new start-ups are on a personal basis, rather than through your UK contractor limited company or other business.
When investing in a qualifying company, you must ensure you meet the conditions for EIS investor requirements. What’s more, the company or enterprise must meet the EIS general requirements for the scheme.
The investment in EIS shares under the scheme is reported on yourSelf-Assessment Tax Return. However, it’s possible to overlook this when you complete your tax return. Therefore, it’s key to keep the details of any company investments under the scheme safe. Another guide on this site details more about this and other potential Self-Assessment tax errors.
Common questions
Those who are thinking about investing under the scheme may have certain questions before they invest. These questions on investing in EIS may include:
- What are EIS investments?
- How does EIS work?
- Where can I find EIS tax-efficient investments?
- How to claim EIS relief?
- How do you report EIS?
In this guide, we’ll look at what to consider when investing in EIS and the various tax benefits of EIS scheme. What’s more, we’ll research EISeligibility, EIS requirements and find out how EIS scheme tax benefits work for individual taxpayers.
Enterprise Investment Scheme (UK) overview
The scheme aims to help small companies, often with a high-risk nature, with their activities. The help comes by raising finance and it offers individuals EIS investment tax relief on new shares in a qualifying company. The money raised for the company will help fund its activities and grow its business. From the investor’s point of view, it’s a tax-efficient way to make investments in small start-up companies. What’s more, an EIS scheme relief of £1,000,000 per person per year is available for qualifying companies (£2 million for knowledge-intensive companies).
It’s important to take note the scheme is very attractive to potential investors. This is because besides receiving income tax relief, there’s an EIS carry back relief feature. In effect, you can claim for EIS income tax relief carry back relief when you carry back investments under the scheme to the previous tax year. If you plan to invest, you’ll require a financial adviser to help set this up. There are plenty of financial advisers out there and you can do your research locally or online.
How to claim EIS tax relief & what is the CGT exemption?
Income Tax Relief & EIS tax benefits
There are several EIS benefits, the main one of which is HMRC Enterprise Investment Scheme relief can be claimed at 30% on EIS qualifying investments up to £1,000,000 in any tax year. It gives a maximum tax reduction in a tax bill (assuming your tax bill is this high) in any year of up to £300,000.What’s more, the allowances and tax relief under this scheme are for individuals. A married couple could invest up to £2 million each tax year, entitling them to the maximum amount of tax relief available of £600,000.
When you invest under the scheme, to be eligible for tax relief, you must hold the shares for at least three years from the date of issue. Failing to do this will result in HMRC withdrawing the EIS scheme tax relief.
With regards to EISeligibility rules, people who are connected to the company won’t qualify. Basically, such connections come in terms of employment or financial interest. Under the EISeligibility rules, if such individuals invest in the company offering the investment, they’re not entitled to Income Tax Relief on their shares. Therefore, to qualify for the EIS scheme benefits this provides, you must be an EIS qualifying investor.
This type of venture can be a great way to invest funds and there’s several tax benefits available. This comes in the hope of a better return in terms of capital growth than other ways of investing or saving. The main reason here is the favourable tax treatment. This is because the scheme allows you to save 30% of your tax bill, subject to the EIS limits mentioned earlier.
Capital Gains Tax (CGT) exemption
Please take note, any gain the EIS tax efficient investments make areCapital Gains Tax-free, and this is providing:
- You hold the shares for at least three years; and
- You claim the income tax relief on them.
A further consideration is the investor can hold the shares for longer. It’ll then potentially allow the investor to accrue their CGT exemption over an extended period, which can be a great attraction and another one of the tax benefits under this type of venture.
Some further tax reliefs are available under the scheme. Please take a look at HMRC’s guidance under helpsheet HS297 on these areas for extra information:
- EIS Loss relief and;
- CGTEIS deferral relief.
These are quite complex tax areas; therefore, you should consider seeking professional advice as part of investing.
Other thoughts on the scheme -EIS carry back & claiming EIS relief (HMRC)
How HMRC EIS relief carry back works?
An EIS ‘carry back’ feature is available when an individual invests under a qualifying company. The `carry back’ feature will allow you to treat all or part of the cost of shares you acquire in one tax year as though you’d acquired those shares in the prior tax year. Relief is then given against the Income Tax liability from the previous year rather than against the tax year in which you bought those shares. What’s more, this is subject to the overriding limit for relief for each year.
How to claim your tax relief?
An investor who invests under the scheme can claim tax relief once the company who they invest in sends through an Enterprise Investment Scheme claim form. The official EIS claim form for this is called an EIS3 form and you’ll receive one of these for each investment. Once the investor receives the HMRC EIS3 claim form, they can make their claim for tax relief through their Self-Assessment tax return. They’ll do this in the tax year which covers the share issue, although, as mentioned earlier, there’s the EIS tax relief carry back feature.
Please visit theHMRC website guide if you require more details and information on the scheme. This contains lots of helpful information and is a good overview of how the scheme works.
Final thoughts
Although the Enterprise Investment Scheme (HMRC) isn’t suitable for all, it could be worth considering for some UK contractors and other individuals. As a contracting professional, when you invest via one of these schemes, you can benefit from EIS tax benefits. If you’ve savings aren’t earning a reasonable interest rate, it’s one option you could consider.
It’s important to take note the EIS income tax relief is attractive. This is because you can save a fair amount of personal tax when you invest in this type of scheme. However, this does depend on your level of earnings. Furthermore, you should review the EISeligibility guidelines, before investing.
Finally, you should do detailed research before investing in any company. As part of this, you should look at how your potential investment into a company under this type of scheme fund might perform in the future. If you enjoyed reading this guide, please have a read of our guide covering tax tips for contractors. Another great read for UK contracting professionals is our guide to contracting in the UK.
Link to Contractor Advice UK group on
Published On: January 4th, 2024 / Categories: Self-Assessment /
