Enterprise Investment Scheme - Proceed with caution

The Enterprise Investment Scheme (or EIS) was first introduced in 1994 as the replacement to the Business Expansion Scheme and will have been used by many thousands of investors to claim income tax relief and/or capital gains deferral relief on investments made into EIS qualifying companies.

At its best, the ability to claim EIS relief can reduce the net cost of a qualifying investment by 30% and result in any future gains made on a disposal of such shares being exempt from capital gains tax.  In some cases, the ability to claim EIS relief on an investment can be the decisive factor in making an investment proposition viable. Indeed, with the ability for a company to seek advance assurance from HM Revenue & Customs that it and the proposed shares to be issued meet the qualifying conditions under EIS, advising investors of the availability of EIS relief can become a pre-requisite in the funding process.

However – and there does always seem to be catch where tax advantages are available – the EIS legislation is a minefield to navigate, with hazards for the unwary investor and company that can deny EIS relief completely or claw back EIS relief previously claimed.  Many of these hazards derive from the fact that the provision of tax relief on investments is considered to be State Aid and therefore legislation has to comply with EU rules and is therefore complicated.

The number of complications increased in November 2015 with the introduction of new legislation which are already beginning to have an impact on companies and investors alike.  For example:

  • For companies that have been trading for more than 7 years (10 years if a knowledge intensive company), EIS relief is not available to investors unless the amount of the EIS investment raised is at least equal to 50% of the company’s annual turnover, averaged over the previous five years and the money raised is employed for the purpose of entering a new product or new geographical market.

Clearly there are many companies that have been trading for more than 7 years (or 10 years if knowledge intensive) that will need to raise investment.  The further conditions to now be met may make EIS unavailable in many cases.

  • Where an investor is already a shareholder in the investee company, any further shares subscribed for will not qualify for EIS relief unless all of the investor’s current shareholding was either subscribed for on incorporation or qualified as risk finance investment (EIS, Seed EIS or Social Investment).

Such rules will have an impact on those investors who have purchased shares from another shareholder or who did not claim EIS relief on a previous subscription for shares.  

Whilst EIS is a fantastic relief for those companies and investors that qualify, the new rules introduced in 2015 may reduce its availability considerably.

For further information concerning EIS and how PEM can assist you, please contact Matthew Eady or Jan Fachot.

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Matthew Eady

Director of Share Schemes and Reward
​I am a Director in the Employment Taxes department. A lot of my time is spent advising companies on employee share incentive and reward arrangements; implementing share schemes and agreeing share valuations with HMRC. I also advise clients on employment tax matters generally, employment status queries and get quite involved in the P11D and Share Scheme Annual Return process.

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