This is a freeview 'At a glance' guide to the risk-to-capital condition for the Enterprise Investment Scheme (EIS).

At a glance

Finance Act 2018 introduced a new 'risk-to-capital' condition for companies raising funds via the Enterprise Investment Scheme (EIS)Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trust (VCT) arrangements.

It applied from Royal Assent on 15 March 2018, however, since 4 December 2017 HMRC have refused to provide Advance assurance if it does not appear that the risk-to-capital condition is met.

The risk-to-capital test has two legs, applied when the shares are issued if it would be reasonable to conclude:

The latter condition is to be considered for investors generally, rather than any specific investor. The loss to capital is a loss of some or all of the amounts subscribed for the shares by the investor.

This measure is intended to exclude artificial EIS, SEIS and Venture Capital Trust (VCT) investments that have no real prospect of risk from benefitting from the tax advantages of the venture capital reliefs. It is not designed to affect genuinely entrepreneurial start-ups.

First leg: The issuing company intends to grow and develop its trade in the long term

There is no definition of ‘grow and develop’ or ‘long term’ and the terms take their ordinary meaning.

Second leg: 'Significant risk' of a capital loss exceeding the ‘net investment return’

‘Significant risk’ is not defined and will be a question of fact on a case-by-case basis.

'Net Investment Return' includes:

In order to assess both of the tests, regard must be had to all circumstances but the legislation particularly references:

Where there are one or more indicators that capital is not being risked this will not automatically mean that the condition is not met. All factors need to be considered together on a case by case basis.

HMRC in its manual at VCM8550 indicate that they will carry out post-investment checks on companies to see if the risk-to-capital condition was met, as well as reviewing if the money raised has been used in accordance with the information provided in their compliance statement.

Following these checks, HMRC are able to withdraw relief if the conditions are not met and advance assurance cannot be relied upon if full facts were not provided to HMRC.

HMRC have issued examples including the following, but they do not contain any calculations, so do not show how the second leg of the test regarding net investment return is expected to work.

HMRC Example 1

A company is set up by postgraduate students to exploit their research, which they expect will eventually have wide commercial value. They have been using university facilities but they now need their own laboratory. The directors prepare a business plan but, as their plans are high risk and long term and the company has no track record, the company is unable to attract investment from the market. The company secures initial investment under the EIS from members of an angel syndicate and a fund manager acting as nominee for a number of individual investors. A schedule of follow-up funding is agreed for the next five years. The directors retain a majority interest in the company. The company uses the money to set up and equip a small laboratory on the university grounds and employ a technician. It expects to expand the laboratory, and employ more technical and administrative staff, over the next five years. 

HMRC Example 2

A film production company is seeking investment for a new film. It sets up a Special Purpose Vehicle (SPV) through which to produce the film, in line with usual industry practice. The company has agreed some pre-sales for the film and has also applied, or intends to apply for Film Tax Relief in respect of the planned investment. The pre-sales and tax relief provide security for a proportion of the overall investment. The remainder of the investment is not secured. The film production company subcontracts elements of the film for which it does not have the expertise in-house, such as set design and visual effects, to different freelancers and companies, but retains overall control of the project and of the decision-making in relation to production activities. The company intends to carry on developing content, such as screenplays, and making films in the future, and intends to reinvest most of the profits from making this film to help it grow and develop as a company.


In Inferno Films Limited v HMRC [2022] TC08472, the First Tier Tribunal (FTT) upheld the appeal of the Welsh film company, Inferno Films. It found that :

The FTT held that both parts of the Risk to Capital cirteria were met and the appeal was allowed.

Useful guides on this topic

EIS: Enterprise Investment Scheme (Subscriber guide)
When can EIS relief be claimed?  What are the conditions for EIS relief?  What are the benefits of EIS relief?

SEIS: Seed Enterprise Investment Scheme
Seed Enterprise Investment Scheme (SEIS): A tax relief for start-ups introduced by Finance Act 2012.

Which investment relief: IR, ER, SEIS or EIS?
What is the difference between Entrepreneurs' Relief (ER) and Investors' Relief? How do they compare to investments in the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS)?

EIS: Qualifying trades & activities
What is a qualifying trade or activity for Enterprise Investment Scheme (EIS) relief? Which trades do not qualify for relief? What are excluded activities?

External links

HMRC’s internal guidance (VCM 8500 onwards)