On September 26, the European Commission approved the government’s proposals to expand the Enterprise Investment Scheme (EIS).The EIS is a government-backed scheme of tax incentives to encourage investment by individuals in small and entrepreneurial trading companies. It’s estimated that it helped raise £500m of investment in 2008/09 and George Osborne announced in March that he wanted to further expand the scheme to stimulate additional investment – by angels or dragons, depending on your point of view. (As the scheme constitutes state aid, it needed to be approved by the European Commission). The EIS scheme works by allowing investors to set a percentage of the cost of shares they subscribe for in EIS companies against their current or preceding year income tax liability. Currently this is 20 per cent, but from April 6, 2012 that will increase to 30 per cent. The limit on amount of investment that gets the income tax relief for any one individual will also be increased from £500,000 per annum to £1m. The minimum investment is £500. The benefits of this for small businesses are clear to see, but what must they do to be eligible? To take advantage of this, the company must issue new ordinary shares that are fully paid up in cash and then must use the money raised for its trade within two years. For the three years prior to the share issue, the company must also pass various tests, including:
- Being based in the UK
- Being independent and unquoted
- Carrying on a ‘qualifying trade’ – essentially this means not financial services or asset backed trades such as property development
- Having less than 50 full-time employees
- Not having gross assets exceeding £7m before the issue and £8m immediately after the issue
Christopher Groves is a partner and Natasha Oakshett is a solicitor at international law firm Withers.
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