If you are a business owner in the UK, you know how challenging it can be to raise money to grow your company. One option that you may want to consider is the Enterprise Investment Scheme (EIS). The EIS is a UK government scheme that provides tax incentives for investors who invest in eligible companies. In this article, we will discuss the benefits of the EIS and how it can help you raise money for your company.
What is the Enterprise Investment Scheme?
The Enterprise Investment Scheme (EIS) is a government scheme that provides tax incentives to investors who invest in eligible companies. The scheme was introduced to encourage investment in small and medium-sized enterprises (SMEs) in the UK. The EIS allows eligible companies to raise up to £5 million each year, and investors can receive up to 30% income tax relief on their investments.
Benefits of the Enterprise Investment Scheme
There are several benefits to the Enterprise Investment Scheme for both investors and companies:
Tax Incentives for Investors - The EIS provides tax incentives to investors who invest in eligible companies. Investors can receive up to 30% income tax relief on their investments, which can help to reduce their tax bill. In addition, investors can defer capital gains tax on any profits they make on their EIS investments.
Access to Funding for Companies - The EIS allows eligible companies to raise up to £5 million each year. This can be a significant amount of money for small and medium-sized enterprises that are looking to grow their business.
Flexibility - The EIS is flexible and can be tailored to meet the needs of different companies. This means that companies can choose the type of investment that is most suitable for them, whether that is equity or debt.
Expertise - The EIS can also provide access to expertise and support for companies. Investors who invest in EIS-eligible companies are often experienced business people who can provide guidance and support to help the company grow.
Investment in High-Growth Companies: EIS allows investors to invest in high-growth companies that may not be available through traditional investment channels, such as the stock market. These companies have the potential for high returns, which can be attractive to investors.
Diversification: Investing in EIS can offer diversification to an investor's portfolio, as the companies involved are often in different sectors and industries.
Long-Term Investment: EIS is designed to be a long-term investment, with a minimum holding period of three years. This can be attractive to investors who are looking for a longer-term investment opportunity.
Capital Preservation: EIS investments may qualify for loss relief, which can help to preserve the capital invested. If the company fails, investors may be able to claim loss relief against their income tax liability.
Access to Expertise: EIS investors may have the opportunity to access the expertise of the company's management team, which can be useful in understanding the company's potential for growth.
How to Set Up an Enterprise Investment Scheme (EIS)
An Enterprise Investment Scheme (EIS) is a government-backed initiative in the UK that encourages investments in early-stage, high-growth potential companies by offering attractive tax reliefs to investors. This helps small, innovative businesses attract funding and promotes economic growth. If you're considering setting up an EIS for your business, this article will guide you through the essential steps. Further below, we have explained some of these steps in detail to make the process as clear for you as possible.
Step 1: Determine Eligibility
Before setting up an EIS, it's crucial to ensure that your company qualifies for the scheme. To be eligible, your company must:
Be unquoted or listed on a stock exchange such as the Alternative Investment Market (AIM).
Have a permanent establishment in the UK.
Have less than £15 million in gross assets before the share issue and not exceed £16 million after the issue.
Employ fewer than 250 full-time equivalent staff.
Not have received more than £5 million in EIS or other risk capital investments in the previous 12 months and not exceed £12 million in total.
Be engaged in a qualifying trade, which excludes activities such as property development, financial services, and some other sectors.
Step 2: Prepare a Business Plan
Develop a comprehensive business plan that outlines your company's objectives, strategies, and financial forecasts. This document is essential to attract potential investors and provide a roadmap for your company's growth.
A strong business plan is essential for attracting investors and demonstrating that your company has a viable strategy for growth. Your business plan should include:
An executive summary outlining your company's mission, goals, and key selling points.
A detailed description of your products or services, including market research and competitive analysis.
A clear explanation of your company's management structure and the qualifications of key personnel.
Financial projections for at least the next three years, including profit and loss statements, cash flow forecasts, and balance sheets.
An analysis of the risks and challenges your company faces, as well as strategies to mitigate these risks.
Step 3: Appoint a Legal Advisor
Engage a legal advisor with expertise in corporate finance and EIS transactions. They will help you navigate the complex legal landscape and ensure compliance with the relevant regulations.
Step 4: Appoint a Financial Advisor or Broker
Seek the help of a financial advisor or broker experienced in EIS fundraising. They will provide valuable guidance on the fundraising process, introduce you to potential investors, and help you promote your investment opportunity. Pro Tax Accountant has an expert team to take care of your EIS matters.
Step 5: Obtain Advance Assurance from HMRC
Before approaching investors, it is advisable to obtain Advance Assurance from HM Revenue and Customs (HMRC). This provides confirmation that your company is likely to meet the EIS eligibility criteria, giving potential investors confidence in your business. To apply for Advance Assurance, you'll need to submit:
A completed application form (VCSSEISAA)
A copy of your company's business plan
The latest financial accounts and forecasts
A copy of the company's Articles of Association
Any agreements between the company and its shareholders, directors, or other related parties
Step 6: Issue Shares to Investors
Once you have received Advance Assurance and secured commitments from investors, you can issue shares to them. Ensure that the shares issued are ordinary shares with no preferential rights, as required by the EIS rules.
Step 7: Submit Compliance Statement to HMRC
After issuing shares, you must submit a Compliance Statement (form EIS1) to HMRC within two years of the end of the tax year in which the shares were issued. This form provides details about the share issue and confirms that the company meets the EIS requirements.
Step 8: Receive EIS Certificates and Distribute them to Investors
After reviewing your Compliance Statement, HMRC will issue EIS certificates (form EIS3) for each investor. You must then distribute these certificates to your investors, who can use them to claim their EIS tax reliefs.
Step 9: Maintain EIS Compliance
It is crucial to maintain EIS compliance throughout the required holding period (usually three years) to ensure that investors retain their tax benefits. This includes keeping track of any changes in your company's activities, structure, or finances that might impact its EIS eligibility.
Step 10: Monitor and Report
It is important to monitor and report your progress on Enterprise Investment Scheme. Below we have created a complete section to explain this process.
How to Monitor and Report the Enterprise Investment Scheme (EIS) in the UK
Monitoring and reporting are crucial aspects of the Enterprise Investment Scheme (EIS) process, ensuring that businesses comply with the scheme's requirements and that investors retain their tax reliefs. This article provides a detailed guide on how to effectively monitor and report the EIS in the UK.
Step 1: Understand the Reporting Requirements
To maintain compliance with EIS regulations, companies must keep HM Revenue and Customs (HMRC) informed about their activities and any changes that may affect their EIS eligibility. This includes:
Submitting annual returns to HMRC.
Reporting any significant changes in the company's activities, structure, or financial position.
Informing HMRC if the company ceases to meet the EIS qualifying conditions.
Step 2: Establish a Monitoring System
Implement a monitoring system to track your company's compliance with EIS requirements. This may involve setting up regular internal reviews, appointing a compliance officer, or using software tools to help manage and report on EIS-related matters.
Step 3: Conduct Regular Internal Reviews
Conduct periodic internal reviews to ensure that your company continues to meet the EIS eligibility criteria. This may involve assessing the following aspects of your business:
Trading activities: Confirm that your company remains engaged in a qualifying trade and that the trade has not substantially changed since the EIS share issue.
Employment: Verify that your company still employs fewer than 250 full-time equivalent staff.
Gross assets: Check that your company's gross assets remain below the specified limits.
Investment limits: Ensure that your company has not received investments exceeding the EIS thresholds.
Step 4: Communicate with Investors
Maintain open lines of communication with your investors to keep them informed about the company's performance, any changes to the business, and the status of their EIS tax reliefs. This can be achieved through:
Regular investor updates or newsletters.
Shareholder meetings or conference calls.
Investor relations platforms or websites.
Step 5: Prepare Annual Returns
As part of your EIS reporting obligations, you must submit annual returns to HMRC. These returns include details of the company's financial performance, activities, and any EIS-related changes. Ensure that your annual returns are accurate, complete, and submitted within the required timeframes.
Step 6: Document Significant Changes
If your company experiences a significant change that may affect its EIS eligibility, you must inform HMRC. This can include:
Changes to the company's trade or activities.
Mergers, acquisitions, or other structural changes.
Changes to the company's share capital or ownership structure.
Maintain clear records of these changes, as they may impact your company's EIS compliance and your investors' tax reliefs.
Step 7: Notify HMRC of Non-Compliance
In the event that your company ceases to meet the EIS qualifying conditions during the required holding period, you must inform HMRC as soon as possible. Failure to do so may result in penalties and the loss of EIS tax reliefs for your investors.
Step 8: Maintain Accurate Records
Keep thorough and accurate records of all EIS-related matters, including:
Share issue details, including the number of shares issued, their value, and the dates of issue.
EIS certificates (form EIS3) issued to investors.
Correspondence with HMRC, including Advance Assurance applications, Compliance Statements, and any other EIS-related communications.
Documentation related to the monitoring and reporting of EIS compliance.
Maintaining these records will facilitate your reporting obligations and provide an audit trail in case of any queries or investigations.
Eligibility for the Enterprise Investment Scheme
To be eligible for the Enterprise Investment Scheme (EIS) in the UK, both the investor and the company must meet certain criteria. Here are the key eligibility requirements:
For the Investor:
Must be a UK resident and pay UK taxes.
Must not own more than 30% of the shares in the company.
Must not be an employee of the company, unless they are also a director.
Cannot be connected to the company or its subsidiaries, which includes immediate family members, business partners, and certain other parties.
For the Company:
Must be a UK-based company.
Must have fewer than 250 full-time employees.
Must have gross assets of no more than £15 million before the investment, and no more than £16 million after the investment.
Must not have raised more than £12 million in total through EIS and other state aid investment schemes such as Seed Enterprise Investment Scheme (SEIS) or Venture Capital Trusts (VCTs).
Must not be listed on a recognized stock exchange at the time of the investment.
Is not expected to shut down after completing a project or series of projects.
Your organization must be carrying out a qualifying trade.
Your organization should have a goal to develop and grow its trade in the long run.
Qualifying Subsidiary Corporations
If your organization owns or controls any other companies, they need to be ‘qualifying subsidiaries’. This approach:
1. Your company should have more than 50% of the subsidiary’s stocks
2. Nobody apart from your organization can be able to control this subsidiary
3. There cannot be any possibility to place a person else in control of this subsidiary
4. The subsidiary must be at least 90% owned by means of your organization
In addition to these criteria, the company must also meet certain conditions regarding the use of the funds raised through EIS, such as using the funds for qualifying business purposes and not engaging in certain prohibited activities such as property development or financial services.
It's important to note that EIS is a complex investment scheme, and eligibility criteria can vary depending on individual circumstances. Investors should seek professional advice before making any investment decisions.
How to Apply for Enterprise Investment Scheme (EIS) as a Company?
If you are interested in raising money through the Enterprise Investment Scheme, there are several steps that you will need to take:
Check Your Eligibility - Before you can raise money through the EIS, you will need to check that your company meets the eligibility criteria.
Prepare Your Pitch - You will need to prepare a pitch that outlines your business and why it is a good investment opportunity.
Find Investors - You will need to find investors who are interested in investing in your company. This can be done through a range of channels, including networking events and online platforms.
Complete the Paperwork - Once you have found investors, you will need to complete the necessary paperwork to issue shares or bonds.
Receive Funding - Once the paperwork is complete, you will receive the funding from your investors.
Which Government Forms are Used to Apply for "Enterprise Investment Scheme (EIS)?
There are several government forms that are used to apply for the Enterprise Investment Scheme (EIS) in the UK. These forms are used by both investors and companies seeking EIS funding. Here are the main forms used:
EIS1: This form is completed by the company seeking EIS funding, and provides information on the company's eligibility for EIS, including details on the company's size, gross assets, and previous funding received. Read more about EIS1 here.
EIS2: This form is also completed by the company seeking EIS funding, and provides additional information on the investment, including details on the proposed use of funds, the investment structure, and any associated risks. Once you have submitted EIS1, HMRC will review your application in 2-4 weeks. To confirm you’ve passed the checks, you’ll receive form EIS2 which you should fill out and send back to HMRC. Read more about EIS2 here.
EIS3: This form is provided by the company to the investor, and confirms that the investor is eligible for EIS tax relief. Investors can use this form to claim tax relief on their income tax returns. Read more about EIS3 here.
SEIS1: This form is used by companies seeking funding through the Seed Enterprise Investment Scheme (SEIS), which is a similar scheme to EIS for smaller, early-stage companies.
SEIS3: This form is provided by the company to the investor, and confirms that the investor is eligible for SEIS tax relief.
It's important to note that these forms are part of a complex application process for EIS funding, and it is recommended that investors and companies seek professional advice before making any investment decisions.
How to Apply for Enterprise Investment Scheme (EIS) as an Investor?
To apply for the Enterprise Investment Scheme (EIS) in the UK, there are several steps that investors and companies must follow:
Check Eligibility: Before applying for EIS, investors should ensure that they meet the eligibility criteria, as outlined by HM Revenue and Customs (HMRC).
Identify Suitable Companies: Investors should identify suitable companies that are seeking EIS funding. This may involve researching potential investments through online platforms, investment advisors, or networking.
Make an Investment: Once a suitable company has been identified, the investor can make an investment in the company through EIS. This usually involves completing an application form and providing information on the investment, such as the amount invested and the tax relief claimed.
Claim Tax Relief: After making the investment, the investor can claim tax relief on their income tax return. This usually involves completing a self-assessment tax return and providing details of the EIS investment.
Provide Compliance Documents: After the investment has been made, the company must provide certain compliance documents to HMRC. This includes a compliance statement and EIS3 form, which confirms that the investor is eligible for tax relief.
Apply with A Compliance Statement - You can submit a compliance statement if you are:
The company secretary
A director
An agent
You can apply by clicking on this link.
It's important to note that EIS is a complex investment scheme, and it is recommended that investors seek professional advice before making any investment decisions. Investors should also be aware of the risks involved, such as the potential for capital loss, illiquidity, and limited exit opportunities.
How "Enterprise Investment Scheme (EIS)" Works
Enterprise Investment Scheme (EIS) funds in the UK are investment vehicles that pool funds from investors and use them to invest in eligible EIS-qualifying companies up to £5 million each year and a maximum of £12 million in your company’s whole lifetime. The funds are typically managed by professional fund managers who have expertise in identifying and selecting suitable EIS-eligible companies for investment.
When investors invest in an EIS fund, their money is pooled with that of other investors, and the fund manager uses this money to invest in a portfolio of EIS-eligible companies. The aim of the fund is to generate returns for investors through capital appreciation and dividends.
One of the primary advantages of investing in an EIS fund is that investors can benefit from the tax incentives provided by the EIS scheme. These incentives include income tax relief of up to 30% on the amount invested, capital gains tax relief on any profits made from the sale of EIS investments, and the ability to defer capital gains tax on any gains made from the disposal of other assets.
EIS funds can be structured in different ways, depending on the fund manager's investment strategy and the needs of the investors. Some EIS funds invest in a diversified portfolio of companies across different sectors, while others may focus on a specific sector, such as technology or healthcare.
Investors in EIS funds should be aware that investing in start-up or early-stage companies can be risky, and the value of their investments can go up or down. EIS funds can also have a relatively long investment horizon, with investors often required to hold their investments for several years before being able to exit.
Investors interested in investing in EIS funds should conduct thorough research into the fund's investment strategy, the track record of the fund manager, and the underlying EIS-eligible companies in the fund's portfolio. They should also consult with a financial advisor or tax professional to fully understand the tax implications of investing in EIS funds.
How Shares are Issued Under "Enterprise Investment Scheme (EIS)?
Under the Enterprise Investment Scheme (EIS) in the UK, shares are issued by companies seeking EIS funding to investors who make a qualifying investment. Here's how the share issuance process works:
Company Valuation: Before issuing shares, the company must determine its valuation, which will determine the price per share. This is typically done through a process of due diligence, which may involve engaging a professional valuation service.
Share Issuance: Once the valuation has been determined, the company can issue shares to investors who make a qualifying EIS investment. This is usually done through a subscription agreement, which outlines the terms of the investment, such as the number of shares purchased, the price per share, and any associated rights or restrictions.
Share Certificates: Once the shares have been issued, the company will typically provide investors with a share certificate, which confirms the number of shares purchased and any associated rights or restrictions.
EIS Compliance: The company must also ensure that the share issuance is compliant with EIS rules and regulations, which may involve providing compliance documents to HM Revenue and Customs (HMRC) and ensuring that the investor is eligible for EIS tax relief.
It's important to note that EIS investments are generally high-risk, and investors should carefully consider the risks involved before making any investment decisions. It is recommended that investors seek professional advice before investing in EIS shares.
When you issue the shares you cannot:
Guarantee a risk-free investment.
Sell the shares during or at the end of the investment period.
Organizes your business activities to let investors benefit in a way not approved under the scheme.
Make a reciprocal investment agreement with the investor’s company to avail of tax relief.
Raise money for the sheer purpose of tax avoidance instead of business growth.
Limitations of "Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) is a UK government-backed initiative designed to encourage investment in small, high-risk, and early-stage companies. While the scheme offers a number of benefits, there are several limitations that investors should be aware of:
Eligibility: Not all companies qualify for EIS. The company must be based in the UK, have fewer than 250 employees, and have gross assets of no more than £15 million. In addition, the company must be involved in an eligible trade, and cannot be engaged in certain activities such as property development or financial services.
Risk: EIS investments are inherently high-risk due to the nature of the companies involved. As a result, investors should be aware that their capital may be at risk, and they may not receive any returns on their investments.
Liquidity: EIS investments are typically illiquid, meaning that investors may not be able to sell their shares easily, if at all. This can make it difficult to realize any gains or recover any losses.
Tax Relief: While EIS investments offer significant tax relief, this is subject to certain conditions, including holding the shares for a minimum of three years. If the shares are sold before this time, the tax relief may be clawed back.
Investment Limits: There are limits on the amount that can be invested in EIS, both in terms of the amount invested in a single tax year and the total amount invested in any one company.
Management Fees: EIS investments may be subject to high management fees, which can eat into any returns.
Exit Strategy: It can be difficult for EIS investors to realize any returns on their investment, as there may be limited exit opportunities for the company, such as through a trade sale or IPO.
Company’s Age Limit: You can acquire funding underneath the Enterprise Investment Scheme if it’s inside 7 years of your organization’s first commercial sale.
What is Compliance Statement for EIS?
A Compliance Statement is a document required as part of the Enterprise Investment Scheme (EIS) in the UK. It is a statement made by the company that is seeking investment through the EIS, and it confirms that the company meets all the requirements of the EIS scheme. The Compliance Statement is a mandatory requirement that must be submitted to HM Revenue and Customs (HMRC) as part of the EIS application process.
The Compliance Statement is a declaration made by the company and signed by the company secretary or a director of the company. The statement confirms that the company has met all the requirements of the EIS scheme, including:
Qualifying Status: The company must confirm that it is a qualifying company under the EIS scheme, meaning it meets the requirements for size, activity, and ownership.
Use of Funds: The company must confirm that the funds raised through the EIS investment will be used for a qualifying business activity, such as research and development, or the creation or expansion of a new business.
Time Frame: The company must confirm that it will meet the EIS scheme's requirements for the minimum holding period for investors, which is three years from the date of the issue of the shares.
Reporting Requirements: The company must confirm that it will provide the necessary reports to investors, including annual reports and accounts, as well as any other information required by the EIS scheme.
The Compliance Statement must be completed and submitted by the company to HMRC within two years of the end of the relevant tax year. Failure to submit the Compliance Statement may result in the loss of EIS tax relief for investors. It is filled and submitted online.
Overall, the Compliance Statement is an important part of the EIS application process, and it ensures that the company seeking investment meets all the necessary requirements of the EIS scheme.
Is "Enterprise Investment Scheme (EIS)" a Good Investment?
The Enterprise Investment Scheme (EIS) can be a good investment for some investors in the UK, but it is important to carefully consider the risks and potential benefits before investing.
One of the main benefits of EIS is the potential for tax relief, which can significantly reduce the cost of investment. Under the scheme, investors can claim up to 30% income tax relief on their EIS investment, which can be carried back to the previous tax year. In addition, EIS investments are exempt from the capital gains tax, provided that certain conditions are met.
However, EIS investments are generally considered to be high-risk, as they are typically made in small, early-stage companies with limited track records and uncertain prospects. These companies may have a higher risk of failure or may take longer than expected to become profitable.
Furthermore, EIS investments are generally illiquid, meaning that it may be difficult to sell the shares or withdraw the investment before the end of the holding period, which is typically at least three years.
In short, the Enterprise Investment Scheme can be a good investment for certain investors who are willing to take on higher risk in exchange for potential tax benefits and the opportunity to invest in small, innovative companies. However, it is important to carefully consider the risks and potential benefits before investing and to seek professional advice if necessary.
Overall, while the Enterprise Investment Scheme can offer significant benefits, it is important for investors to carefully consider the risks and limitations before making any investment decisions.
Should We Get Professional Advice Before Going for Enterprise Investment Scheme (EIS)?
Yes, it is highly recommended to seek professional advice before investing in the Enterprise Investment Scheme (EIS) in the UK.
EIS investments are complex and can be high-risk, so it is important to fully understand the potential benefits and risks of investing before committing any capital. Professional advisors, such as financial advisors, tax specialists, and legal experts, can provide valuable guidance on the suitability of EIS investments for your individual circumstances and investment goals.
Professional advisors can also help you navigate the complex application process for EIS funding, including completing the necessary forms and ensuring compliance with EIS rules and regulations.
In addition, professional advisors can help you identify and evaluate potential investment opportunities, as well as assess the financial health and growth potential of the companies seeking EIS funding.
Overall, seeking professional advice before investing in EIS can help you make a well-informed investment decision and minimize the risks involved.
Conclusion
The Enterprise Investment Scheme is an excellent option for companies looking to raise money to grow their business. The scheme provides tax incentives for investors and allows eligible companies to raise up to £5 million each year. The EIS is flexible and can be tailored to meet the needs of different companies, and can also provide access to expertise and support.
In summary, EIS funds can be a useful way for investors to gain exposure to a portfolio of EIS-eligible companies while benefiting from the tax incentives provided by the EIS scheme. However, investors should be aware of the risks involved in investing in early-stage companies and should conduct thorough research before investing in an EIS fund.