Enterprise Investment Schemes – A Basic Guide
Introduction – Enterprise Investment Schemes – a basic guide is an article to explain the variety of generous income and capital gains tax reliefs to investors on the issue of new shares in small rapid growth unquoted stocks.
This article is – Enterprise Investment Schemes – A Basic Guide – therefore it is not a detailed analyses of the various schemes and tax breaks, for that you need to get professional advice. It seeks to give a basic understanding of the EIS and only covers shares issued on or after 06 April 2009 up to 2014. Additionally, you should be aware that the rules for EIS are subject to change so professional advice is required for the latest applicable reliefs and legislation.
When considering Enterprise Investment Schemes you should also refer to the Venture Capital Schemes manual which give guidance on the Enterprise Investment Schemes as well as other HMRC tax relief schemes.
It goes without saying, that Enterprise Investment Schemes are not a method for tax avoidance. If the main purpose of a scheme is found to be tax avoidance then no relief will be given.
Income Tax Relief:
– on a minimum investment of £500 and a maximum of £500,00 to £1 million from 2012/13 (£500,000 2008/09 – 2011/12), in any one tax year.
– Tax relief increased from 20% to 30% on 6 April 2011.
– The maximum amount of investment that a qualifying company can receive is limited to £5 million.
– There is a carry back facility.
– Shares must be held for 3 years.
– Cannot be “connected” with the company.
During the period starting 2 years before the issue of shares and ending 3 years after the issue (or 3 years after the trade began if that followed the share issue), you are “connected” through your financial interest or by employment as a remunerated employee, director or partner. There is an exception for unremunerated directors who are “Business Angels”. You have sufficient financial interest when you directly or indirectly possess or be entitled to acquire more than: 30% of the ordinary share capital, or 30% of voting rights, or 30% of the loan capital plus issued ordinary share capital (on the basis of nominal values, not amounts subscribed or market values), of the company or any subsidiary. It is recommended to wait until after subscriber shares to issue EIS shares. It is also advisable to become a director only once shares have been issued. Relief might be denied to directors involved in the company prior to issue. Generally, Loss relief and Capital Gains Deferral are both available to “connected” investors, Income Tax Relief and Capital Gains Exemptions are not.
These rules are subject to exceptions for directors (see s167-s169 ITA 2007), which broadly permit payment for services as a director once the shares have been issued.
Capital Gains Tax exemption
– Any gain is free of CGT provided Income Tax relief received and shares disposed of after 3 years.
– Losses can be set off against income of disposal year or previous year.
Capital Gains Tax deferral relief
– Payment of CGT can be deferred where gain is reinvested in shares of an EIS qualifying company.
Tax reliefs can be reduced or withdrawn after it has been given.
The Qualifying Company
– Must be unquoted. The Alternative Investment market (AIM) and the PLUS Quoted and PLUS Traded Markets are not considered to be recognised markets.
– The Gross assets cannot exceed £15 million (£7 million before April 2012) before the share issue, or £16 million (£8 million before April 2012) immediately after the issue.
– A company that employs fewer than 250 (50 before April 2012) full-time employees at the time of the share issue. Carrying out the trade for which the money was raised for at least four months before an investor is eligible for EIS relief.
– Generally must not be a subsidiary.
– May have subsidiary, must own more than 50% or 90% if a property management subsidiary.
– If subsidiary carries out the trade then the qualifying company must own 90% of the subsidiary.
– The company is not allowed to raise more than £5 million in any 12 month period from the venture capital schemes (i.e. a combination of EIS and two other schemes (the corporate venturing scheme and the venture capital trust (VCT) scheme)).
– Trade must be conducted on a commercial basis for profit. A list of “excluded activities” under the EIS can be found here .
Seed Enterprise Investment Scheme (SEIS)
The Finance Act 2012 introduced the Seed Enterprise Investment Scheme (SEIS).
If the EISs are for small businesses then the SEIS is more for start-ups. The SEIS has applied since 6 April 2012.
The qualifying conditions for SEIS are very similar to EIS. The qualifying amount is £150,000. Qualifying investors can claim income tax relief worth 50% of the cost of buying shares in the company.
More details on SEIS can be found here .
How to Apply For EIS
The Small Company enterprise Centre (SCEC) unit of HMRC administer EISs. SCEC deal with qualification and monitoring of the company. There is an advance assurance scheme. It is probably a good idea to use the advance assurance procedure rather than go to the time and expense of an application that gets rejected, especially if representations have already been made to potential investors. An EIS1 form is required for every share issue. There are time restrictions on the acceptance of EIS1. An EIS2 is issued by SCEC if the company qualifies. An EIS3 form is supplied to the company for the investors to claim tax relief.
The EIS is administered by HMRC’s Small Company Enterprise Centre (SCEC)
HM Revenue & Customs
1st Floor Ferrers House
Castle Meadow Road
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