The Enterprise Investment Scheme is a government programme which can be used by businesses with less than £15 million in assets. The scheme is designed to sell off shares in your company, with investors in the scheme being given Capital Gains, Income and Inheritance Tax reliefs in exchange for buying shares in your company.
As stated on the GOV website, “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. Your company must receive investment under a venture capital scheme within 7 years of the first commercial sale.”
After a business owner receives an investment, they must strictly follow the rules of the EIS scheme for three years, or the tax relief benefits will be withheld from its shareholders.
Within the first two years of receiving the investment, the money can be used for research or growing one’s company, but cannot be used to invest in another business. In addition to applying to small-asset businesses, eligible EIS candidates must not be listed on a recognised stock exchange, must not own anything but ‘qualifying subsidiaries’, must not be over 50% owned by another company, must be within seven years of their first commercial sale and must be established in the UK.
Regarding the issuing of shares, arrangements cannot be made with investors that provide special treatment. This extends to deals of reciprocal investment, guaranteed or protected investments, selling shares at the end or during an investment period or a deal that structures your activities to allow investors to benefit in a way not intended by the EIS. In addition to being in breach of the scheme, many of these activities could result in or involve insider trading or tax avoidance practices.
To apply to the HMRC EIS, prospective EIS beneficiaries must provide – where possible – a; business plan, memorandum and articles of association, last annual accounts and cash flow forecasts, shareholder agreements or drafts and prospectuses for attracting investment.
For more information, take time to read over the terms and conditions of the EIS on the GOV website, and look at other schemes such as the Seeded Enterprise Investment Scheme and Social Investment Tax Relief.