Creative Industry Tax Reliefs (CITR) are a collection of Corporation Tax reliefs that allow qualifying companies...
The Enterprise Investment Scheme (EIS) has been designed to increase investment in the early development of high potential growth businesses. The scheme is similar to the Seed Enterprise Investment Scheme (SEIS) although that remains more focused on very early-stage companies.
The EIS was launched back in 1994 and it succeeded the popular Business Expansion Scheme. The EIS encourages investment in smaller, unquoted, trading companies but the limits are significantly larger than for the SEIS.
The reliefs can be limited under certain circumstances. As with any investment, it is important that anyone participating in a share issue is aware of the risks involved. This is especially the case when looking at an EIS investment as there can be a significant risk to any capital invested. Investors should be very careful not to invest any money that they are unprepared to lose. The tax breaks effectively offset some of the capital risk.
The investments can also be very illiquid and need to be held for at least three years before a share sale can be attempted. Some EIS offers include an exit strategy but of course there are no guarantees.
Regardless, the possibility of high returns has made the EIS a very popular scheme especially for wealthy and savvy taxpayers. It is important to note that the tax reliefs are only available where there is sufficient liability against which to set it.
Under certain circumstances, small business owners can also benefit from the EIS rules to invest in their own businesses.
A company looking to raise finance using both the SEIS and EIS must raise investment first using the SEIS before moving on to the EIS. However, it is possible to apply for both the SEIS and EIS at the same time. This means that once the company passes the £150,000 SEIS limit they will almost immediately be able to move on and raise additional funds of up to £5,000,000 or more using the EIS.
Companies seeking EIS investment are typically more developed than those looking for funding using the SEIS and the investment limits and tax reliefs available reflect this. It is important to remember that it is not just a matter of meeting the eligibility requirements of raising finance but also ensuring that your business can attract investors.
For its investors to be able to claim and keep the tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. If the company ceases to meet one or more of these conditions, investors may have their tax relief withdrawn.
The process for a company to get approved to issue EIS shares involves a fair degree of work. However, the process itself is relatively straightforward once the company meets the necessary qualifying conditions.
There are a number of conditions that a company must meet in order to obtain formal approval of EIS qualifying status.
The main qualifying criteria for EIS investee businesses are as follows:
There are also time limits as to when investments can be raised by the company and how and when the money must be spent:
A company can use the scheme only if it meets the following criteria:
It is very important that businesses looking to raise finance using the EIS scheme ensure that they qualify. Otherwise, their investors will be unable to claim the promised tax reliefs. HMRC offers an ‘advance assurance’ service that helps ensure everything is in order before raising finance. It is important to note that the advance assurance service provided by HMRC is a discretionary, non-statutory, service.
It is no longer possible to request advance assurance on speculative applications. This leaves some start-ups in a Catch-22 situation where it can be hard to attract investment without advance assurance. However, HMRC does not require the company to have formalised offers of investment but rather to have some potential investors on board who are likely to invest if advance assurance is granted.