EIS
ENTERPRISE INVESTMENT SCHEME
In order to encourage investments into startups and early-stage businesses the UK Government has created a tax relief scheme called EIS: Enterprise Investment Scheme. This takes the form of income tax and capital gains reliefs when an investor makes an investment into a startup or business that is EIS eligible.
ARE YOU ELIGIBLE?
As a start-up, you want to be EIS-compliant in order to offer to your potential investors all the benefits associated with the opportunity of investing in your venture. The amount of money you can raise under this scheme is significant: you can raise a maximum of £5M per year, or £12M in your company’s lifetime, a very good amount for an early-stage start-up.
In additions to this, to be EIS compliant, you must:
- Have less than 250 full-time employees
- Have gross assets worth less than £15 million before any shares are issued, and not more than £16 million immediately afterwards
- Be with a permanent establishment in the UK
- Not be listed
- Have had your first commercial sale in the last seven years (unless the investment is needed to enter into either a new product or geographical market, or the company already accessed an EIS scheme in the past)
- Not control another company other than qualifying subsidiaries
- Not be controlled by another company, or not have more than 50% of its shares owned by another company
- Not expect to close after completing a project or series of projects
INVESTORS MUST RISK THEIR CAPITAL!
It’s important to stress that this scheme works only if the investors embark on this journey taking the same risks as co-founders and existing shareholders. This means that the new shares must be full-risk ordinary shares which:
- Are not redeemable
- Carry no special rights to your assets
- Can have limited preferential rights to dividends. However, the rights to receive dividends cannot be allowed to accumulate or allow the dividend to be varied
NO PREFERRED SHARES
In other words: no preferred shares!!
…and no workarounds too. So, when you issue new shares there cannot be an arrangement:
- To guarantee the investment or protect the investor from risk
- To sell the shares at the end of, or during the investment period
- To structure your activities to let an investor benefit in a way that’s not intended by the scheme
- For a reciprocal agreement where you invest back in an investor’s company to also gain tax relief
- To raise money for the purpose of tax avoidance
THE USE OF MONIES
The money raised by the new share issue must be used for a qualifying business activity, which is either a qualifying trade, used to prepare for a qualifying trade (which must start within 2 years of the investment) or plain R&D that’s expected to lead to a qualifying trade.
Furthermore, the money raised by the new share issue must be spent within 2 years of the investment, and it cannot be used to buy all or part of another business.
Follow the rules for at least 3 years after the investment is made or your investors will lose their benefits! Have a look at this page by the UK Government in order to understand all the limitations (and opportunities) involved.
APPLY FOR ADVANCED ASSURANCE
Find out if your proposal to raise investments could qualify for a venture capital scheme and what you need to apply for advance assurance at this Gov.uk website
SUBSCRIBE TO OUR NEWSLETTER
TO RECEIVE UPDATES ON NEW ARTICLES
THE CHECKLIST VALUATION METHOD
Investment scams: five red flags to look for
Skimpflation
The Rocking Origins Of Crowdfunding
Uk Spring Budget 2023
Lehman Scale
SUBSCRIBE TO OUR NEWSLETTER
TO RECEIVE UPDATES ON NEW ARTICLES
Who Decides Your Company’s Value?
The Scorecard Valuation Method
Karma Works
