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The Enterprise Investment Scheme offers two-way benefits to applicable small businesses and investors. Those who do invest in these companies can reduce their tax liability up to £300,000.
The Enterprise Investment Scheme (EIS) is a UK Government investment programme designed to help small companies that are considered risky to attract investors. Investors that buy shares in these risky - but often innovative - companies will receive tax relief, making an investment more lucrative.
Investors can reduce their tax liability by up to £300,000 for investing under the EIS scheme. Moreover, if the investor decides to sell the shares in the future, any profits made on these shares will not be subject to Capital Gains Tax (CGT). The shares must be owned for at least three years and can be purchased through the EIS fund or via the business directly.
Both the small business and investors must abide by regulations to ensure the overarching goal of small business investment is maintained, and so that the system is not abused for tax relief.
Small businesses that want to use the EIS must:
These are the general conditions for a company to use EIS. There may be higher limits for other businesses carrying out research and innovative activities.
The money raised by the business through selling shares must be used within two years in most instances, and it must be used on a “qualifying trade”. The money can be spent on preparing, researching or developing something that would lead to the qualifying trade activity.
The rules on what does and doesn’t qualify can be complex.
A business can apply to use the EIS by providing an extensive list of documents to prove your business qualifies for the scheme. These documents will need to be sent to HMRC’s Venture Capital Relief Team. If the application is successful, HMRC will respond with a compliance certificate that can be shared with investors so they can claim tax relief.
The process is worthwhile for many businesses and their investors, but it can also be complex.
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