EIS legislation – Is your company EIS eligible?
Many small and medium companies need to raise a significant amount of money in their early stages of development to continue to grow, but this capital needs to come from somewhere! The UK government has recognised that investors hoping for a strong return on investment may see these companies as risky, and to make these investments attractive options, there need to be greater benefits for investors.
These benefits come in the form of government-backed venture capital schemes that have been specially designed to attract investment. They generally function by offering tax reliefs to individuals who buy and hold new shares, bonds, or assets for a specific period of time.
Nevertheless, not all of these schemes are created equal and they’re not open to everyone. The company, investor, and proposed investment must meet the specified conditions of the investment scheme opted for.
The Enterprise Investment Scheme (EIS) is one of these investment schemes helping small companies raise funding for their continued growth and development. If you’re wondering whether your company is EIS eligible, and want to get your head around its benefits and limitations, read on.
How to tell if your company is EIS eligible
There’s a comprehensive set of criteria your company must meet to qualify for EIS; let’s start with some basic requirements.
Your company may be EIS eligible if at the time of investment it has:
- no more than £15 million in gross assets.
- less than 250 employees.
- been more than seven years since its first financial sale.
Money raised by a new share must:
- Be spent within two years of the investment (or the date you started trading if later).
- Not be used to buy all or part of another business.
- Be used to develop or grow your business.
- Pose a risk of loss of capital for the investor.
These are the basic eligibility requirements for companies hoping to qualify for EIS, and you will need to meet further criteria.
It is also important to note that these requirement limits will be higher (more relaxed) if your company specialises in research, development, or investment. There are special rules for these ‘knowledge-intensive’ companies (KICs) as they often require higher levels of investment.
Although a qualifying KIC does not need to use a knowledge-intensive EIS if they want to use EIS, they will need to if they wish to either raise more than £12 million in the company’s lifetime or did not receive investment under a venture capital scheme within seven years of their first commercial sale (as these would be limitations under the standard EIS).
It is also important to keep in mind that in HMRC’s view, EIS should not be used for existing working capital requirements or to repay existing debts. The scheme is explicitly for development expenses that will help facilitate company growth.
Individuals can invest up to £1 million per tax year or £2 million if they are KIC investments.
It is technically feasible for people to invest more, but they wouldn’t qualify for income tax relief on the excess (a big incentive to invest). They would, however, still qualify for capital gains deferral and IHT relief.
Maximum in gross assets
For your company to qualify for EIS it must not have gross assets worth more than £15 million before any shares are issued, and no more than £16 million immediately afterwards.
The value of a company’s assets will generally be determined by reference to the values shown on its balance sheets. All forms of property that appear on your balance sheets are also assets for the purpose of this rule.
Follow this link to take an in-depth look at the gross assets requirement.
Maximum number of employees
At the time of the shares being issued, your company must not have any more than 250 employees.
This is measured on the full-time equivalent number of employees, so two part-time employees could be counted as one full-time employee.
Maximum money you can raise
Through EIS, up to £5 million can be raised for your company each year, and a maximum of £12 million in your company’s lifetime (this includes finances gained from other venture capital schemes).
This is significantly more than what you can raise through The Seed Enterprise Investment Scheme (SEIS) with a limit of £150,000 and Social Investment Tax Relief (SITR) with a limit of £1.5 million, but less than what you can raise under EIS as a KIC.
If you want to raise more up to £10 million per year and up to £20 million in your company’s (and any subsidiaries’) lifetime, it is worthwhile checking if you qualify as a KIC.
Your company must also be carrying out a qualifying trade, preparing to carry out a qualifying trade (this must commence within two years of the investment), or conducting research and development that’s expected to lead to a qualifying trade.
If more than 20% of your trade comes from things like coal or steel production, property development, or financing services, you may not qualify for EIS.
Obligations to investors
As a company, you must agree to conform to the scheme rules so that your investors can claim and keep EIS tax reliefs on their shares. If you don’t fulfil your obligations for at least three years after the investment is made, tax reliefs will be withheld or withdrawn from your investors.
If you are a company hoping to use EIS, keep in mind that you can apply for advance assurance from HMRC to see if they think your share issue will qualify before you go ahead.
The film industry has an excellent track record of delivering impressive investment results.
Films4U is a specialised film funding, production, and distribution company. Unlike most EIS companies, we guarantee the distribution of every film that we have raised money for through your investments. As each film is guaranteed to be seen and generate a return, we’ve had over 600 films return profits.
We’ve been investing in the industry for over 30 years, and haven’t lost money on a film yet. Instead, we’ve consistently returned market-leading profits.
Getting to grips with EIS tax relief can be difficult for people who haven’t done it previously. To learn more, chat with one of our account managers on 08082 750 904 or register your interest.
The information contained on this website should not be taken as financial advice or as a personal recommendation by Films4U. Before investing you should always seek appropriate legal and financial advice from an authorised person specialising in investments of this kind.