The Enterprise Investment Scheme (EIS) was launched in 1994, with the aim of encouraging private investment into UK startup, small or medium-sized businesses (SMEs) – and thereby supporting entrepreneurship.
Investment into early-stage companies carries a high degree of risk, so investors who subscribe for shares in EIS qualifying companies are given both income tax and capital gains tax reliefs to compensate for this.
The SME sector is vital for the UK economy, both in terms of revenue generated for the Exchequer and job creation. Some 68 per cent of employment growth between 2012 and 2013 was attributed to high-growth small businesses (HGSB) and in 2013 these businesses contributed an estimated 36 per cent towards UK economic growth.
The scheme has been supported by all political parties and its success in driving investment into early-stage companies is widely recognised. To support this success, in 2012 the EIS income tax relief was increased from 20 to 30 per cent and the Seed Enterprise Investment Scheme (SEIS) was introduced, specifically to encourage investment into startup companies.
Since investment in startups is particularly risky, the tax breaks are more generous than EIS. SEIS income tax relief is at 50 per cent and the capital gains tax treatment is more favourable. Investors are required to hold EIS and SEIS shares for three years to obtain the reliefs; in addition, most EIS and SEIS investments are not subject to inheritance tax after a two year holding period.
Since the EIS was launched in 1994, over 21,000 companies have received investment through the scheme, and over £11bn of funds have been invested. SEIS has also been hugely successful. Since 2013 over £80m of seed capital has been raised through the mechanism, with 32 per cent of this being invested in high-tech startups. EIS and SEIS have encouraged greater investment into UK high-growth businesses, thus boosting the economic recovery and the growth of the UK economy.
EIS and SEIS are certainly British enterprise investment success stories. But how can entrepreneurs make sure they are benefiting from these schemes?
EIS and the entrepreneur
For entrepreneurs wanting to attract investment under EIS or SEIS, before approaching investors it is necessary to obtain Advance Assurance from HMRC that the company, its trade and its shares qualify for EIS/SEIS purposes. Companies must have a permanent establishment in the UK and must not be controlled by another company.
For EIS they must not have gross assets of more than £15m before the share issue and must have fewer than 250 full-time employees. For SEIS, the company’s gross assets must not exceed £200,000, the company must have less than 25 employees and have been trading for less than two years. The company must exist wholly for the purposes of carrying on a new qualifying trade. The maximum amount that can be raised under the SEIS is £150,000 and the company cannot already have received any EIS or VCT investment before the SEIS shares are issued.
Currently companies can only raise up to £5m in total in any 12 month period from venture capital schemes. These schemes are: EIS, SEIS and Venture Capital Trusts (VCTs). The £5m limit must also take into account any other investment which the company has received in the relevant 12-month period, such as friend and family money or grant finance. In the recent budget, it was announced that the total investment that can be raised by a company will be capped, and there will be limits on the age of the company seeking investment, but we are waiting for EU State Aid Approval for the details to be finalised.
Read more about EIS and SEIS:
- Entrepreneurs don’t understand EIS and SEIS
- Tax relief schemes: Are you taking full advantage of what’s available?
- SEIS has attracted a new wave of investors to startups
The Enterprise Investment Scheme Association
The EIS Association (EISA) is the official trade body for the Enterprise Investment Scheme and is an independent, not for profit organisation which exists to assist in the flow of capital and resource available to UK small to medium-sized businesses through the EIS and SEIS.
The EISA works closely with HMRC, HM Treasury and the FCA to enhance EIS and promote the scheme to a wider audience. EISA has been highly effective in achieving major changes in the EIS including: the increase in EIS income tax relief; the removal of the loss relief cap; increasing the annual limit for investment into an EIS company to £5m; raising the gross assets to £15m pre new money; and increasing in the maximum number of employees allowed to 250. Members receive regular technical updates on the EIS and SEIS and can participate in industry consultations. The EISA launched an on line EIS Diploma in 2014 which gives an overview of the EIS for financial advisers and wealth managers.
The EISA does not itself raise capital for companies, but most of the members are actively involved in helping companies raise finance under EIS and SEIS. The legal and accountancy members can give advice on legal structures, applying for advance assurance and tax issues and suggest and sources of investment. Many of the EIS and SEIS Fund Managers are members and they are always looking for interesting new companies to invest in across a whole range of different industries.
The EIS and SEIS schemes are now firmly established and the industry has “come of age” with a range of highly professional advisors and fund managers who can demonstrate a strong track record of successful investments and exits, giving a good return for their investors and enabling wealth creation. The EISA is pleased to support and facilitate the growth and increasing professionalism of the industry and welcomes the contribution made to the growth of the UK economy.
Sarah Wadham is director general of the EIS Association.