Understanding the Enterprise Investment Scheme (EIS): How it works

Working with growing businesses, and their investors, is what we do. We’ve been on both sides of the table – and we work with investors, management teams, auditors, business owners and other key stakeholders constantly – to help them identify the best; the best investment value, the best business growth opportunity, the best financial support to build themselves up operationally, the best leadership strategy, the best fit.

And when it comes to helping business grow with the right business capital and operational strategy, all of what we do becomes a critical importance to your business plan.

In this blog, we look at the Enterprise Investment Scheme (EIS), how it works, how it benefits investors, how it helps businesses grow, and how we can help you find the right investment partnership.

What is the EIS?

The Enterprise Investment Scheme was introduced by the UK government in 1994 with an aid to help younger, higher-risk, growing businesses raise business capital by offering investors considerable tax relief benefits.

Essentially, the scheme helps businesses firm-up their growth capital within 7 years of their first commercial sale, and to build a growth strategy, supported by the necessary growth capital they may need, to get to where they need to be, quickly.

How does the EIS help businesses?

Under EIS, you can raise up to £5 million each year, and a maximum of £12 million in your company’s lifetime. This also includes amounts received from other venture capital schemes such as Venture Capital Trusts, the Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR), state aid approved under the risk finance guidelines (and it stretches to money received by any subsidiaries, former subsidiaries or businesses you’ve acquired).

Your company must receive investment under a venture capital scheme within 7 years of its first commercial sale, and are eligible to use the scheme if you have a permanent establishment in the UK, are a privately trading company (and you have no plans on trading publicly in future), your business doesn’t control another company (other than qualifying subsidiaries) and is not controlled by another company and doesn’t expect to close after completing a project or a series of projects.

To qualify for the scheme, your business also mustn’t have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards, have fewer than 250 full-time equivalent employees at the time when the shares are issued and needs to carry out a qualifying trade, such as these.

If you’re interested in knowing more about how to get started, the Enterprise Investment Scheme Association, the official trade body and not-for-profit organisation set up to aid the provision of capital to UK small and medium-sized enterprises (SMEs) through the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS), has produced a great reference guide here.

Check if you qualify here.

How does the EIS help Investors?

For the investor, it’s a tax efficient way to invest in small companies – up to £1,000,000 per person per year in qualifying companies.

What makes it even more attractive is the ‘carry back’ facility where investments can be applied to the preceding tax year.

The Carry Back facility allows the all or part of the cost of shares acquired in one tax year, to be treated as though those shares had been acquired in the preceding tax year. Relief is then given against the Income Tax liability of that preceding year rather than against the tax year in which those shares were acquired. To understand this facility in more detail, visit the HMRC site here.

Since this scheme was launched, it has promoted more than £10bn of private investment within the UK economy, and the success of this initiative led to the creation of a secondary scheme called the Seed Enterprise Investment Scheme (SEIS), which promotes investments in even earlier-stage (and therefore riskier) companies through even greater tax relief.

There are currently 5 EIS tax reliefs available to investors in companies qualifying under the EIS, which include Income Tax relief, CGT (Capital Gains Tax) Freedom, Inheritance Tax Relief, CGT Deferral Relief and Loss Relief (all detailed here).

However, it may seem straightforward enough – there are a number of legislations and regulations around investment under the EIS, and it is always recommended to seek council from professional advisors first, before investing.

How we help.

Our business is growth – we help businesses get things in order to long-term growth: whether that be operationally, raising the right capital, implementing a leadership team that is focussed on growth, and more. Whether private or public, working with key stakeholders means we understand what’s important to both parties. Our network of investors and our long-term success at helping businesses manage themselves better, means that we are best placed at helping you find exactly what you need.

The process can be intricate – and although many businesses do undertake the process themselves, many opt to work with advisors who are experienced and provide specialist support – especially when it comes to applying for EIS and administering the process with HMRC, on their behalf. That’s where we come in too.

So, if you’re a business looking for the next capital boost, or whether you’re an investor who is looking to take advantage of opportunities like the EIS, let us help.

Getting ready to restart after lockdown: A Case Study

Read more

Aiming for growth? Here’s how CFPro’s services help to get you there.

Read more

3 ways CFPro helps your business grow: Transition, Transaction & Corporate Governance services

Read more