A simple guide to EIS funding

If you’re looking for funding for your small business, you may want to consider the Enterprise Investment Scheme (EIS).

This article breaks down what the EIS is, who’s eligible, and how to apply.

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What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme is one of four government venture capital schemes, the others being the Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR), and the Venture Capital Trust (VCT).

EIS encourages investors to buy new shares in your business by offering tax relief to individual investors.

EIS allows you to raise up to £5 million each year as part of the scheme, and a maximum of £12 million across your company’s lifetime. If you’re part of any of the other venture capital schemes, the amounts you raise from those also go towards this total.

EIS is specifically for growth and development, and the money you raise from it should be put towards that.

There are rules that you need to follow so your investors can claim their EIS tax relief. If you don’t follow them for at least three years after the investment is made, the tax relief will be withheld or withdrawn. We’ll cover what those rules are later.

EIS rules – what can the money be used for?

There are some rules around how you spend the money you raise from the EIS. To start with, it must be spent on one of the following:

• a qualifying trade
• preparing to carry out a qualifying trade (which must start within two years of the investment)
• research and development that’s expected to lead to a qualifying trade

We’ll cover what counts as a qualifying trade below.

As well as the above, the money raised by a new share issue must:

• be spent within two years of the investment (or the date you started trading if that’s later)
• not be used to buy all or part of another business
• pose a risk of loss to capital for the investor
• be used to grow or develop your business

EIS risk clause – what does it mean to ‘pose a risk of loss to capital for the investor’?

One of the most potentially confusing parts of EIS is the risk clause. This is the part that states the money you raise through EIS must be used for an activity that poses a risk of loss to capital for the investor.

This is because EIS is supposed to be used for growth and development. It could be growing your customer base, your revenue, your number of employees, or something else along these lines.

Pushing to expand your business inevitably carries some level of risk, so EIS is there to help you make big steps forward that you would otherwise not have the funding or the appetite to try.

When deciding if you meet the risk to capital condition, HMRC will look at things like your company’s:

• sources of income
• assets
• structure
• use of subcontractors
• marketing of the investment opportunity
• relationship with other companies

In order to meet the criteria, you mustn’t have any risk reducing arrangements in place. These would be things that result in an investor:

• getting priority over other investors
• being able to withdraw their money as soon as possible
• protecting their money so that other investors' money is used first

Am I eligible for the Enterprise Investment Scheme?

As EIS is based on shares and investors – your company must be incorporated for you to take part in the scheme. If you’re a partnership or a sole trader, you’ll have to look into other forms of business funding.

Now, assuming your company is incorporated, there are some other criteria you need to meet before you’re deemed eligible. Your company must:

• have a permanent establishment in the UK
• not be trading on a recognised stock exchange at the time of the share issue and not have plans to do so
• not control another company other than qualifying subsidiaries
• not be controlled by another company, nor have more than 50 per cent of its shares owned by another company
• not expect to close after completing a project or series of projects
• not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards
• have less than 250 full-time equivalent employees at the time the shares are issued
• carry out a qualifying trade. If you’re part of a group, the majority of the group’s activities must be qualifying trades

What is a qualifying trade for EIS?

According to gov.uk, most trades will count as ‘qualifying trades’, but your company may not qualify if more than 20 per cent of your trade includes things like:

• coal or steel production
• farming or market gardening
• leasing activities
• legal or financial services
• property development
• running a hotel
• running a nursing home
• generation of energy, such as electricity and heat
• production of gas or other fuel
• exporting electricity
• banking, insurance, debt or financing services

How to apply for the Enterprise Investment Scheme (EIS)

So once you know you’re eligible, there’s one final part – how to apply for EIS funding.

The long and short of it is that when you’ve issued your shares, you complete a compliance statement (EIS1) and send it to HMRC. You can find the EIS1 on the gov.uk website.

If you’ve been given advance assurance, you need to provide copies of any documents that have changed since HMRC issued your advance assurance.

If you’ve not got advance assurance, you’ll need to provide:

• the business plan and financial forecasts
• a copy of your latest accounts
• an explanation of how you meet the risk to capital condition
• details of all trading and activities you’ll be carrying out, and how much you expect to spend on each activity
• an up-to-date copy of your memorandum and articles of association
• the information or documentation you use to explain the fundraising proposal to your investors
• details of any other agreements between your company and the shareholder
• a list of the amounts, dates and venture capital schemes under which you’ve previously received investment, if any
• any other documents to show you meet the qualifying conditions

These should cover both your business and any subsidiaries.

In order to submit your compliance statement, you have to have been carrying out your qualifying business activity for at least four months, and you must submit it within two years of this date, or within two years of the end of the tax year in which the shares were issued (whichever is later).

You must complete a separate application for each share issue.

Once you’ve completed your compliance statement, you’ll need to send it and your supporting documents to HMRC. You can do this either by email or post:

Email:

[email protected].

Post:

Venture Capital Reliefs Team WMBC HM Revenue and Customs BX9 1BN

Should your EIS application be successful, HMRC will write to you, and include a compliance certificate (EIS3) to give to your investors.

The letter will include a unique investment reference number which you have to include on the compliance certificates you give to investors. This is because investors need both the compliance certificate and reference number when they claim tax relief.

If HMRC decides the you don’t meet the requirements for EIS, they’ll write to you explaining why. You have the right to ask them to review their decision or to appeal against it, if you choose.

EIS isn’t right for me, what other funding can I get for my business?

EIS is a very particular type of funding, so it may not be right for your business. The good news is that there are lots of other types of funding you can look into that may better suit your needs.

There are the three other venture capital schemes, but if those are not for you, you could also try:

• R&D Tax Credits
• Childcare Business Grants Scheme
• Princes Trust grants
• Small Business Research Initiative (SBRI)
• Heritage Lottery Fund Start-up grants

Have a look at our guide to small business grants and see if any of those are right for you and your business.