Why EIS can be a good source of funding for SMEs
For small to medium sized businesses (SMEs) looking for investment to grow their business, the Enterprise Investment Scheme (EIS) can make a major difference.
The Enterprise Investment Scheme (EIS) replaced the Business Expansion Scheme in 1994, and is designed to encourage investments in unquoted companies that are involved in a qualifying trade. SMEs may be able to seek investment of up to ?5 million* a year if their company has less than ?15 million of assets and fewer than 250 employees. At the same time, their investors get generous tax relief benefits.
For smaller companies and start-ups, the Seed Enterprise Investment Scheme (SEIS) was launched in April 2012, to "stimulate entrepreneurship and kick start the economy." If your company has been trading for less than 2 years and has less than ?200,000 of assets, you may be able to attract investment of up to ?150,000. As the company grows, a start-up that has availed itself of SEIS investment can then progress to EIS if required, provided they meet the qualification criteria.
For high net worth investors, EIS can be an attractive albeit high risk investment proposition. They can invest up to ?1 million in EIS companies in a tax year (?2 million, if any amount above ?1 million is invested in knowledge-intensive companies) and receive 30% income tax relief. Provided they maintain the qualifying investment for at least 3 years, any gain made on disposal is tax free, although losses are allowable. Investors can also defer paying tax on other capital gains made within certain time limits of the investment.
For SEIS, the tax breaks are more generous, although the investment limits are much smaller; investors can receive initial tax relief of 50% on investments of up to ?100,000 along with full CGT exemption and a generous deferral relief.
All this sounds good for both the SME and investor, but there are some snags and issues that can lead to the invalidation of the tax advantaged benefits of the investment. This could mean that the SME does not get the funding required for growth and/or that the investor loses their right to the expected tax reliefs.
For example, EIS tax relief is usually not available for share issues in companies that have been trading for more than 7 years. It will also not be available if an investor is 'connected' with the company - eg an employee or director with more than 30% share capital or voting rights. An investor must also have taxable income which is at least equal to the investment made for tax relief to be available in full in the tax year.
There are also administrative details that need to be correct, such as ensuring shares are issued and dated correctly and also ensuring that payments are received in full for the shares before issuing any share certificates. Investors should also make sure that they have paid for the shares before the date on their share certificate. If these things don't happen in the correct order, the EIS/SEIS approval given by HMRC may be invalid.
To find out more about getting funding for your business, or how you can invest in an EIS as part of your personal tax planning strategy, contact Kellands Corporate.
*In the Autumn budget 2017, the annual investment limit for knowledge-intensive companies was doubled from ?5 million to ?10 million through the EIS and by VCTs.
EIS and SEIS are typically high-risk investments and are normally only suitable as medium or long-term investments. These are complex products and are not suitable for all investors.