At a glance
The Enterprise Investment Scheme (EIS) is a government approved scheme that provides tax incentives in the form of a variety of tax reliefs to investors who invest in smaller, unquoted, trading companies.
- The primary tax relief takes the form of a reduction in Income Tax at a flat rate of the cost of new shares.
- Tax relief is increased from 20% to 30% from 6 April 2011.
- The minimum amount an investor can invest in any one company is £500 with a maximum investment of up to £1 million*
* From 6 April 2012 the thresholds for qualifying companies for EIS increase to.
- The max amount an individual can invest into a company increases from £500,000 to £1 million per tax year.
- The maximum amount of investment that a qualifying company can receive is limited to £5 million
From 6 April 2013 Cap on unlimited tax reliefs
Legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater) Draft legislation will be published for consultation later this year.
Finance Bill 2012
Two new measures are proposed from 6 April 2012:
- Seed Enterprise Invesment Scheme (SEIS) with a CGT break for assets invested in a SEIS
- See Seed Enterprise Scheme (SEIS)
Tax Relief
There are a number of potential tax reliefs associated with EIS:
Income Tax Relief
- Individuals who subscribe for shares in an EIS qualifying company will receive of 30% (from 6 April 2011), previously 20%, relief of the cost of the shares offset against the individual’s Income Tax liability for the year in which the investment was made.
- The EU approved the increase in relief of 30% in September 2011, allowing claims may be backdated to 6 April 2011.
- It is possible to ‘carry back’ all or part of the investment to the preceding tax year as long as the limit for relief is not exceeded for that year.
- Using carry-back, an individual can subscribe for £1,000,000 of EIS shares in a current tax year and carry back £500,000 to the previous year is that year’s entitlement has not been used.
- An individual is able to reduce his tax liability to zero through EIS relief, allowing the taxpayer to claim back any repayable tax deducted at source, such as bank interest or PAYE.
Note that there are several important qualifying conditions attached with EIS Income Tax relief:
- The individual cannot be ‘connected’ with the qualifying EIS company – that is he or she cannot:
- Be remunerated as a company employee, partner, or director (unless an unremunerated ‘business angel’), or
- Directly or indirectly possess or is be entitled to acquire more than:
- 30% of the ordinary share capital, or
- 30% of voting rights, or
- 30% of the loan capital plus issued ordinary share capital (on the basis of nominal values, not amounts subscribed or market values),
of the company or any subsidiary;
between the period commencing two years before the issue of EIS shares and the later of three years after the investment was made and the date the company commences trading.
- The individual must retain the shares for a minimum of three years. If the shares are disposed of within three years the relief will be clawed back (unless the disposal was to a spouse or civil partner, in which case the spouse or civil partner is deemed to have subscribed for them). See note on ‘Relief Clawback.’
- Investors who invest in start-ups or other small companies through a partnership structure are not eligible for EIS relief. There have been calls to government to modify this rule during 2011 following consultation on the relief.
Capital Gains Tax Exemption
- There will be no CGT charged on any gain of shares disposed after three years on which Income Tax relief was given but not withdrawn.
Capital Gains Tax Deferral Relief
- CGT can be deferred if the proceeds are invested in EIS shares. The gain can be realised from any asset but the share investment must take place one year before of three years after the disposal of the asset. The minimum or maximum EIS investments do not apply to deferral relief.
Loss Relief
- If EIS shares are disposed of at a loss at any time, the loss (after any Income Tax relief has been taken into account) can be offset against income for that year and the previous year instead of being offset against capital gains.
Relief Clawback
The clawback of relief works in one of several ways depending on the nature of the disposal.
- Where the individual gifts the shares within three years, all of the original relief obtained will be withdrawn and an assessment made in respect of the relief given.
- Where the individual sells the shares within three years for a profit, again the original relief obtained will be withdrawn and an assessment made in respect of the relief given.
- Where the individual sells the shares for a loss the relief clawed back will be the proceeds of the sale multiplied by 20%.
Qualifying companies
To qualify for the EIS scheme companies must fulfill certain criteria. They must be:
- A trading company. Most trades qualify but ‘excluding activities’ include property development, farming and market gardening, coal and steel production, hotel and nursing home operation and management, and many financial activities. See HMRC website for a complete listing.
- Unquoted at the time of the share issue. This means the company cannot be listed on the London Stock Exchange or any other recognised stock exchange. The Alternative Investment Market (AIM) and the PLUS Quoted and PLUS Traded Markets are not treated as recognised markets under EIS rules.
- A ‘small company’. Gross assets cannot exceed £7 million (£15 million from April 2012) before the share issue, or £8 million (£16 million from April 2012) immediately after the use.
- A company that employs fewer than 50 (250 from April 2012) full-time employees at the time of the share issue.
- Carrying out the trade for which the money was raised for at least four months before an investor is eligible for EIS relief.
EIS and management buy-outs
In past HMRC held the general view that a management buyout cannot qualify for EIS relief due to the prior involvement of the acquiring managers in the trade whose ownership is transferred in the buyout.
In Thomason & Ors v HMRC [2010] UKFTT 579 (TC) the First Tier Tax Tribunal held that relief may be available for the initial subscription of shares as at that point any new company formed to take on a trade in a buy-out has not actually carried on that trade.
Disqualifying activities
All money raised must by issue of relevant shares must be employed wholly for the purpose of the qualifying business activity within a time limit of 2 years.
When a company held cash in an instant savings account: the Upper Tier Tax tribunal held that it did not qualify for EIS relief, case: Christopher Richard Skye Inns Ltd v HMRC [2011] UKUT B25 (TCC)
Small Print
The rules on EIS are found in Part 5 of the 2007 Income Tax Act. It is worth the read; many claims to EIS relief fail on what might outwardly appear to be minor techical issues.
Finance Bill 2012 will contain measures to provide an increase in:
- the thresholds for qualifying companies for EIS
- the max amount you can invest into a company
- the annual amount an individual can invest under EIS
Contact Details
The EIS is administered by HMRC’s Small Company Enterprise Centre (SCEC)
SCEC
HM Revenue & Customs
1st Floor Ferrers House
Castle Meadow Road
Nottingham
NG2 1BB
Further advice may be sought from the Enterprise Investment Scheme Association (EISA)
EISA: www.eisa.org.uk
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