What Is EIS Investment and Who Can Qualify to Participate?
Discover the essentials of EIS investment, including eligibility criteria and participation steps for potential investors.
Enterprise Investment Scheme (EIS) investments offer significant tax incentives to investors supporting early-stage companies in the UK. This scheme encourages investment into smaller, higher-risk businesses by providing benefits such as income tax relief and capital gains tax deferral.
Understanding eligibility and participation is crucial for both investors and startups seeking funding.
Who Is Eligible to Invest
Eligibility for the Enterprise Investment Scheme (EIS) is based on the investor’s UK tax residency. Individuals who pay UK income tax, whether residents or non-residents, qualify. Tax reliefs under EIS apply only to individuals, emphasizing personal investment rather than corporate involvement.
The maximum annual investment is capped at £1 million, or £2 million if at least £1 million is invested in knowledge-intensive companies. Investors benefit from a 30% income tax reduction on the amount invested but must hold shares for at least three years to retain these benefits. Selling shares before this period results in the loss of tax reliefs. Additionally, individuals connected to the company, such as employees or those holding more than 30% of its shares, are disqualified from claiming relief.
Requirements for EIS Companies
To qualify for EIS, companies must be unlisted, though those listed on the Alternative Investment Market (AIM) are eligible. They must have no more than £15 million in gross assets before investment and no more than £16 million after. Additionally, eligible companies must employ fewer than 250 full-time equivalent employees at the time of investment. These criteria ensure the scheme supports smaller enterprises.
The company must have been trading for less than seven years, except for knowledge-intensive companies, which qualify for up to ten years from their first commercial sale. Funds raised through EIS must be used for growth and development within two years and cannot be used to acquire shares in another company. Only independent businesses, not controlled by another company, are eligible.
Participation Steps
Investors begin by identifying EIS-qualifying companies, often through specialized platforms or financial advisors. Evaluating a company’s business model, growth prospects, and financial health is essential. This includes reviewing financial statements, business plans, and market analysis.
After selecting a company, investors purchase shares directly. The company must issue an EIS compliance certificate (Form EIS3) to enable the investor to claim tax relief. If uncertainties arise, the Advance Assurance process allows companies to seek confirmation from HM Revenue & Customs (HMRC) about their EIS eligibility. However, Advance Assurance does not guarantee ongoing compliance, so investors should monitor their investments.
Compliance Paperwork
EIS compliance requires precise documentation. After issuing shares, companies must submit Form EIS1 to HMRC, detailing the share issuance and how funds will be used. HMRC reviews this form to confirm the company meets all qualifying conditions.
Once approved, HMRC provides EIS2 and EIS3 certificates. The EIS2 certificate confirms the company’s compliance, while EIS3 certificates are issued to investors, allowing them to claim tax relief. Companies must maintain accurate records of compliance paperwork to ensure investors can claim their tax benefits without delays or complications.