The Enterprise Investment Scheme (EIS) explained

What it is, how it can benefit you, and what you need to do to get involved

What is EIS?

The government set up the Enterprise Investment Scheme, or EIS, to encourage wealthy businesspeople to plough money into small companies which might otherwise seem too risky.

This is great news for start-up entrepreneurs, because you can use the scheme to reward existing investors with tax breaks, and attract new ones – greatly increasing your chances of getting the money you need.

How does EIS work?

The scheme offers investors a number of perks and incentives in return for investing in small, high-risk companies.

For example, investors are offered income tax relief proportional to the cost of the shares they purchase through the scheme, and if they make a loss when they sell their EIS shares, they can claim loss relief – further cutting their tax bill.

Investment made in EIS is intended for companies at the early stages of development, with relatively low levels of staff and assets. So the scheme plays a vital role in helping Britain’s start-ups.

Chancellor George Osborne announced sweeping changes to the EIS system in his 2011 Budget. Perhaps the most high-profile was the increase in income tax relief from 20% to 30%; this means that investors have even more reason to fund a company via EIS than before, and enhances a start-up’s chances of securing the right investment.

Does the EIS scheme attract much investment?

Yes, very much so. In a recent survey by NESTA, 80% of the business angels surveyed had invested through the EIS at least once, clearly demonstrating the pull of the scheme. Furthermore the EIS has consistently provided more money for early-stage companies than the venture capital industry; at one stage it was providing twice as much.

How much can I get from EIS?

Under the terms of the scheme you can receive up to £500,000 from a single investor in a single tax year, and you can receive a maximum annual sum of £2m through the initiative.

It’s important to note that the amount of money invested via EIS differs markedly from industry to industry. In 2008-09, hi-tech companies received investment totalling £123m; construction firms received just £13m. HMRC has published a table listing total EIS investments by industry, which may help you gauge the amount you’re likely to get by applying for EIS funding.

Am I eligible for EIS?

The vast majority of trades qualify for EIS investment, so it’s highly probable that your firm will be eligible. Only a few trades are excluded – these include shipbuilding, coal and steel, farming, property development and accountancy. For a full list of the trades which aren’t permitted under the scheme, visit the HMRC website.

In his 2011 Budget speech, the chancellor announced that the qualification rules have been relaxed significantly. Previously, an EIS company could employ no more than 50 staff; this has been increased to 150. Furthermore, under the old rules, EIS companies were allowed gross assets of no more than £7m; this has now risen to £15m.

Although the majority of companies qualify for the scheme, it’s important to bear in mind that there are a number of restrictions. For example, you cannot receive EIS investment if you’re quoted on the London stock exchange, or controlled by a bigger firm. Furthermore, the scheme is designed to help companies enhance their existing trade; if you want to use the EIS investment to change the nature of your business, you probably won’t get the funding.

How do I get involved with EIS?

If you want to reward you existing investors by securing EIS benefits for them, you need to apply to the Small Companies Enterprise Centre (SCEC) which runs the scheme. Simply visit the following page, fill out the EIS(AA) form and send it off to HMRC. The Revenue will then decide whether you qualify for the scheme, and let you know if you can proceed with your application.

To complete the application, you need to fill out the EIS1 form, which is also included in the page linked above. Once you’ve filled out and sent off the form, HMRC will make a final decision on your application, and let you know whether your investors qualify for EIS relief.

If you want to be considered for new investment from wealthy individuals who aren’t already connected with your company, the best thing to do is visit the Enterprise Investment Association website.

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