The Enterprise Investment Scheme (EIS) explained
If you’re an early-stage business with relatively few staff and assets, you could be eligible for EIS funding. Find out more below…
What is an Enterprise Investment Scheme (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, who can use the scheme to reward existing investors with tax breaks. The scheme can also be used to attract new investors – greatly increasing your chances of getting the money you need.
Since the EIS was launched in 1993, more than 27,000 companies have received investment, while over £18bn in funds have been raised. The majority (56%) has been put into companies raising EIS funding for the first time.
How does the EIS scheme 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. If they make a loss when they sell their EIS shares, they can claim loss relief – further cutting their tax bill.
Investment made through EIS is intended for companies at the early stages of development, with relatively low levels of staff and assets. This means the scheme plays a vital role in helping Britain’s start-ups.
The scheme rules dictate that your investors can claim and keep EIS tax reliefs relating to their shares. If you don’t follow the rules for at least three years after the investment is made, the government can withhold or withdraw tax reliefs from your investors.
What amount of finance can EIS raise?
Under the terms of the scheme, you can raise up to £5m each year from individual investors, and a maximum of up to £12m over the lifetime of your business. This includes any finance received from other venture capital schemes.
It’s important to note that the amount of money invested via EIS differs markedly from industry to industry. In 2016-17, businesses in the information and communication received funds totalling more than £650m – around 37% of all investment.
In 2016-17, 43% of EIS recipients got investments of £150,000 or less – a similar proportion to previous years. Over the same period, another 43% scooped investments of £2m or more, while 24% received more than £4m.
What can I use EIS investment for?
The government has set fairly strict rules on what EIS investment can and can’t be used for.
Gov.uk stipulates that it must be used for “qualifying business activity”. This could include any of the following:
- A qualifying trade (follow the link to find out what qualifies)
- Preparing to carry out a qualifying trade (which must start within 2 years of the investment)
- Research and development that’s expected to lead to a qualifying trade
Additionally, the money raised by the new share issue must:
- Be spent within two years of the investment, or the date you started trading (if later)
- Not be used to buy all or part of another business
- Pose a risk of loss to capital for the investor
- Be used to grow or develop your business
Is my business 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.
Certain sectors seem to receive a disproportionate amount of EIS funding. In 2016-17 (the latest year for which data are available), the information and communication, professional, scientific and technical, manufacturing, and wholesale and retail trades made up 68% of all EIS investment (£1.2bn).
Your company is eligible to use the scheme if:
- It has a permanent establishment in the UK
- It is not trading on a recognised stock exchange (such as the London Stock Exchange) at the time of the share issue, and does not plan to do so
- It does not control another company other than qualifying subsidiaries
- It is not controlled by another company, or does not have more than 50% of its shares owned by another company
- It does not expect to close after completing a project or series of projects
- Fewer than seven years have passed since your company’s first commercial sale
Your company and any qualifying subsidiaries must:
- Not have gross assets worth more than £15m before any shares are issued, and not have more than £16m immediately afterwards
- Have fewer than 250 full-time equivalent employees at the time the shares are issued
For a more comprehensive look at eligibility for the EIS scheme, visit Gov.uk.
How can I raise an EIS investment?
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.
You should have the following information to hand in order to get assurance from HMRC that you meet the qualifying criteria.
For all schemes, you must include the following information for your company and its subsidiaries:
- How much you hope to raise
- The business plan and financial forecasts
- A copy of the latest accounts (if available)
- Which companies will use the investments
- Details of all trading and activities to be carried out, and how much you expect to spend on each activity
- A list of the amounts, dates, and venture capital schemes under which you’ve previously received an investment
- An up to date copy of the memorandum and articles of association, and details of any changes you expect to make
- A copy of the register of members from the date you apply for advance assurance
- The latest draft of any documents you use to explain your proposal to potential investors
- Details of any other agreements between the company and the shareholders or VCT
- A signed letter from one of your directors or trustees if you’re allowing an agent to act on your behalf
- Any other documents to show you meet the qualifying conditions for the scheme
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.
Enter the Start-Up Series to raise EIS
One way to raise EIS funding is through The Start-Up Series – the UK’s largest seed funding competition.
Run in partnership with Worth Capital & Amersham Investment Management, the competition selects one business each month to win £150,000-£250,000.
The investment comes from a dedicated EIS & SEIS fund, launched specifically to back the qualified winners of the series of competitions.
Businesses are eligible for the Start-Up Series if they meet the criteria outlined above.
The competition runs from the 1st to the 14th of every month. Enter here.