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.
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 If you don’t follow them for at least three years after the investment is made, the tax relief will be withheld or withdrawn.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.
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:
We’ll cover what counts as a qualifying trade below.
As well as the above, the money raised by a new share issue must:
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:
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:
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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:
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:
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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:
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:
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 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:
Have a look at our guide to small business grants and see if any of those are right for you and your business.
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