Enterprise Investment Scheme

Qualifying and Excluded Trades

Not all business ventures qualify for inclusion in the EIS. Amongst those excluded are:

• Banking
• Leasing
• Legal services
• Accounting services
• Farming
• Forestry
• Hotels
• Property Development
• Nursing Homes 
• Shipbuilding
• Steel production
• Coal productions
• Feed-in Tariff electricity generation or exporting.

Most other types of business will qualify for inclusion in the scheme on the understanding that the company intends to develop and grow its business interest over the long term. 

Companies permitted to raise more funds through the scheme include knowledge-intensive companies such as those with a higher research and development spend, or the creation of intellectual property. Most companies within the scheme would be considered risky ventures, so there is also the understanding that investors are taking considerable risks, realising they could lose more of their invested capital than they get back from other returns from the investment.

EIS Scheme Rules

As well as the initial qualifying criteria a company must meet in order to benefit from the scheme, there are a few other stipulations. These conditions must be met throughout the 3-year period. The company must:

• Have a permanent base in the UK.
• Be engaged in a qualifying trade.
• Not be part of a scheme to avoid tax.
• Exist for genuine business reasons.
• Not be under the control of another company.
• Not be a 51% subsidiary of any other company.
• Be an unquoted company.
• Have only fully-paid issued shares.
• Use the money raised through the EIS share issue only for the qualifying business activity.
• In order to attract tax relief, schemes cannot involve any guarantees or exit arrangements.

There are also certain criteria regarding who can invest under the scheme:

• An investor cannot own more than 30% of the shares either directly or indirectly.
• Investors who are paid employees or directors of the EIS company cannot normally claim EIS relief. In some circumstances, investors can receive a ‘normal and reasonable’ remuneration for their work.

Options to Minimise Risk

The scheme recognises that not all investors wish to pour all their available funds into one company. Alternatives exist to help potential investors spread their risk by subscribing to an EIS approved investment fund or Venture Capital Trust (VCT).

Approved investment funds employ a fund manager to collate the total sum from a number of subscribers to the fund. The subscriber’s money is then allocated, by the manager, between a number of different companies.

Benefits and Gains for the Investor

It’s possible for the investor to realise a total deferral and tax saving of 60% of the initial investment. This is achieved through the following incentives:

• After three years, any gain from the sale of shares is exempt from capital gains tax as long as all income tax has been claimed.
• The deferral of capital gains, with no limit, on other assets by reinvesting some (or all) of the gain into an EIS company. This must happen within three years before or one year after the gain was accrued. Certain events may mean capital gains tax becomes chargeable at a later date.
• Qualifying investments up to £1million per year attract 30% income tax relief. Certain events, such as shares sold, may trigger a withdrawal of EIS relief.
• Investing in knowledge intensive companies attracts a further £1 million allowance per investor, provided the investment exceeds £1 million.
• Relief against capital gains tax, or income tax in some circumstances, for losses made on the disposal of EIS shares.