Investment opportunities unlocked: navigating the Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) is an important UK tax relief, particularly at a time when companies may struggle to borrow from banks or face high interest costs where they can do so. Being able to access capital from other sources can be vital, and the EIS tax reliefs are the key to making businesses more attractive to potential investors, as Tax partner Craig Coyle explains.

The marketing people suggested a bit of Barbenheimer ‘hype’ might help with a dry and complex tax matter. So, as we look at the advantages and complexities of the Enterprise Investment Scheme, expect a few tenuous links to 2023’s summer movie phenom…

How can the Enterprise Investment Scheme help attract investors?

Enterprise Investment Scheme relief is valuable to investors. As well as 30% income tax relief on their investment, they do not pay capital gains tax on exit if the shares are held for three years, as well as getting income tax relief for any losses. This is best illustrated with examples.

You invest £100,000 in Barbenheimer Films Limited. After four years and a toy-inspired/doomsday double-bill movie bonanza, the shares are sold for £1m. Consequently, you receive £30,000 off your income tax bill in the year of investment. Alternatively, you could carry this back to the prior year if you choose. The bonus is that you do not pay any capital gains tax on exit, thus receiving the full £1m.

In an alternate universe where Ken is your business advisor, you invest £100,000 in Beach Movies Ltd. Beach Movies goes into liquidation a year later after its documentary about how to ‘beach’ bombs at the box office. You receive £30,000 off your income tax bill as above and also get a tax deduction against income for the remaining £70,000, worth up to £32,900 for additional rate payers in Scotland. The overall loss on the investment is therefore “only” £37,100.

In addition, capital gains incurred on other investments can be deferred by investing in the EIS in certain circumstances.

Qualifying for the Enterprise Investment Scheme: company criteria

The rules around EIS are, much like the science behind Oppenheimer’s deadly creation, highly complex and difficult to summarise. This is an area in which appropriate professional advice is essential. Forget what Ken or Alan recommend, speak to a chartered accountant.

We can, however, summarise that the company claiming EIS status must meet the following basic criteria:

• Be an unquoted trading company
• Not be an excluded trade for EIS purposes
• Be independent (i.e. not a subsidiary)
• Have gross assets of less than £15m before and £16m after the EIS investment
• Have less than 250 employees (less than 500 if knowledge-intensive)
• First commercial sale not more than 7 years ago (10 if knowledge-intensive).

Qualifying for the Enterprise Investment Scheme: individual criteria

Again, there is a significant amount of complexity in this area. Since there was no Accountant Barbie in the movie to explain it, I’ll outline some of the key criteria for an individual to qualify for the Enterprise Investment Scheme. They must:

• Own less than 30% of the company (including anything owned by your associates) for a period 2 years before and 3 years after investment
• Not be an employee of the company
• Only be a director in very limited circumstances on which professional advice has been taken
• Invest no more than £1m in any tax year
• Invest “new” money – not the conversion of an existing loan – this is a key point; the order of investment is crucial to obtaining the EIS relief.

The importance of Advanced Assurance

It is advisable to apply to HMRC for Advanced Assurance that the company meets the qualifying criteria for the Enterprise Investment Scheme. This allows the business to offer investors certainty that they can invest knowing the tax reliefs should be available. Within a competitive funding and investment environment, this is a clear advantage in making sure your investment does not look more like a Sindy.

Application for Advanced Assurance needs to be supported by a business plan demonstrating how the company intends to utilise the funds. If you are considering raising funds from private investors, getting Advanced Assurance timeously can be key to securing that investment.

Once the investment is made, Form EIS 1 is submitted to HMRC by the company. HMRC then provide a form for the investor to use to support the claim for relief made in their tax return.

The Seed Enterprise Investment Scheme: a generous alternative for SMEs

The Seed Enterprise Investment Scheme (SEIS) is the wee sister of the Enterprise Investment Scheme, available for smaller companies and investments. The fundamental difference is that SEIS provides more generous tax relief.

In terms of tax relief, the 30% income tax reduction becomes 50%, thus reducing the amount at risk on an investment of £100,000 in the Beach Movies Ltd example to £26,500 for an additional rate taxpayer in Scotland. The maximum annual investment by an individual in SEIS is £200,000, which has recently doubled from the previous £100,000 limit.

A qualifying company must have been trading for less than 3 years, have fewer than 25 employees and have gross assets of less than £350,000. Up to £250,000 can be raised through the Small Enterprise Investment Scheme but the company must not have claimed EIS relief previously.

As with EIS, an Advanced Assurance route is available for SEIS and is highly recommended.

Harnessing EIS and SEIS to attract investment in your business

EIS and SEIS are valuable reliefs that can be incredibly helpful in attracting investment into businesses in need of capital. This is particularly relevant at a time when interest rates are high, and companies of the relevant size may struggle to borrow in any event.

The tax rules in this area are however very complex and the use of Advanced Assurance and professional advice throughout the process is essential. In the Barbenheimer Films example, if there was a small error that meant the investment did not qualify for EIS, the investor would have an income tax bill of £30,000 and a capital gains tax liability of £180,000. They would, no doubt, be instructing their lawyers to try to recover this from Barbeheimer Films.

Professional advice for business tax success

For over a decade, Consilium Chartered Accountants have helped Scottish businesses to pay the right amount of tax. We have extensive experience in managing the process of applying for Enterprise Investment tax reliefs and assisting investors with their claims.

Contact our Tax partner, Craig Coyle to discuss how Consilium can achieve your business goals and better manage your business tax affairs.

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