In the first of a two-part post on tax schemes, we thought it would be helpful to provide a bit of background to the Government’s Enterprise Investment Scheme and its impact on crowdfunding investments. Tomorrow we will cover the Seed Enterprise Investment Scheme.
Enterprise Investment Scheme
The original Enterprise Investment Scheme (EIS) was introduced in 1994 to encourage wealthy individuals to invest in small higher-risk companies in return for favorable tax breaks. Under the terms of the scheme, a small company (defined as having fewer than 250 employees and gross assets of £15m or less) can receive up to £500,000 investment from an individual in a single year and a maximum of £2m total in a given tax year. There are certain further restrictions to the scheme that entrepreneurs should be aware of. For example, while most industries are EIS eligible, certain sectors are excluded such as property development, legal and accounting, farming, coal and steel etc. (for a full list of excluded industries please refer to the HMRC website). In addition, a company is not eligible for EIS if the investment is intended for the purpose of changing the nature of the company’s business or if it does not have at least 4 months of trading history.
Investors in an EIS eligible company are entitled to tax relief equaling 30% of the cost of the shares, set off against the individual’s tax liability for the year in which the investment was made (up to a maximum investment amount of £1,000,000). The EIS also provides capital gains tax relief upon the sale of the shares and, if the shares are sold at a loss, the amount of that loss can be used to offset any tax liability.
How can I apply?
To become eligible for the EIS and allow its investors to claim the tax reliefs relating to their shares, companies are required to obtain clearance with the Small Company Enterprise Center (SCEC), which is part of the HMRC. The SCEC operates an advance assurance scheme that allows companies to “pre-register” an offering and receive confirmation as to whether it complies with the requirements of EIS. Although voluntary, it is highly advisable to take advantage of the advance assurance scheme to ensure that there are no surprises later in a fundraising process.
While we do not intend to go into too much detail of the process, once a company has received SCEC clearance (after completing and submitting form EIS1), it will receive Form EIS2 confirming that the requirements are met and sufficient Forms EIS3 to send to investors to allow them to claim the relevant tax relief. A company is required to repeat the process each time it raises money and wants to provide EIS tax relief for its investors.
It goes without saying, but we are not tax experts and nothing included in this blog post should be taken as tax advice of any kind. If you are interested in taking advantage of the EIS incentives we recommend that you consult with your tax adviser or, if you don’t have one yet, ask us and we will be happy to introduce you to one of our trusted suppliers.