The Enterprise Investment Scheme – Everything you Need to Know

The enterprise investment scheme is a fantastic opportunity for new businesses to grow in both business and confidence during their early stages; but what is it, and can you benefit from it? 

EIS is a government scheme aimed at offering tax relief to investors of growing businesses. The purpose of the scheme is to incite investors to make investments that may otherwise be overlooked due to short sale histories and consequent uncertainty. So far, EIS has helped over 32,000 businesses to secure investments and expand. 

There are currently four different venture capital schemes available for small and growing businesses in the UK – EIS, SEIS, SITR and VCT. These schemes are all aimed at different types, sizes and stages of businesses, and it’s important to check which one is the best for you before making a decision on which scheme to apply for. 

Can I Apply for the Enterprise Investment Scheme?

Like all investment schemes, your company needs to tick a few boxes before applying for EIS. If the EIS specifications don’t apply to you, it’s worth checking other schemes to see if they better suit you and the plans you have for your business. You can apply for EIS if your company:

• Is less than seven years old: It must have been less than seven years since your company made its first sale.

• Is not trading on a stock exchange: Your company cannot be trading on a recognised stock exchange to qualify for EIS. This is because your company must be unquoted, as EIS intends to help smaller companies that have less appeal for investors than companies listed on a stock exchange. 

• Has an established location in the UK: This property must be a permanent place of business for your company, such as a production factory or an office space where staff are employed to work. The nature of the location depends on what your business does, but it must be used for a large part of your company’s functionality.

• Does not control another company: The only exception is when your company owns more than 50% of a subsidiary’s shares, and no other parties control these shares or have the potential to take over control. If the investment is going to be used for a qualifying subsidiary, your company must own 90% of the subsidiary. 

• Is not controlled by another company: Less than 50% of your company’s shares can belong to another company for you to qualify for the enterprise investment scheme. Your company cannot be controlled by any other company in the form of shares, voting power or documentation that offers power over functions to another company. 

• Does not plan to close: Your company cannot be based around a single project or a set of projects that it will close down after completing. This is because EIS is intended to help small businesses grow and is not meant to fund short-term and quick burst projects that won’t achieve that end.

• Does not have more than £15 million in gross assets: Your company cannot own more than £15 million in assets before shares; the limit after shares is £16 million. This applies to all qualifying subsidiaries as well. 

• Has fewer than 250 employees: To ensure that the EIS funding is being applied to companies that need it the most, it’s limited to businesses with fewer than 250 employees. 

• Is part of a qualifying trade: There are a few trades that don’t qualify, but the chances are that your business will qualify in some capacity: check out the section below for a full list of trades that do not qualify for EIS. 

What is a Qualifying Trade?

A qualifying trade is a trade that allows your business to qualify for the enterprise investment scheme. Most trades do qualify, but the government’s venture capital scheme manual does lay out a few exceptions. Excluded activities may not disqualify your company from EIS: their impact on your application depends on how much of your company they make up and several other deciding factors. So which trades don’t qualify for EIS? Here are just a few:

• Money-lending and other financial activities: This includes insurance and banking sectors as well. The manual explains that this exclusion is due to the financial risk of ‘providing capital for lending or underwriting’.

• Dealing in land, commodities or shares: The manual states that dealing in commodities is defined as trading on a commodities market for resources. 

• Dealing in goods outside of retail or wholesale contexts: The trading of goods that doesn’t lead to distribution is disqualified from EIS. 

• Receiving licence fees or royalties: This exclusion does not apply to royalties acquired from intellectual property or other intangible assets created by the company issuing the shares. 

• Farming or other gardening developing produce for sale: This applies to agriculture, livestock farming and market gardening.

• Energy generation: Generating energy, heat or producing gas or fuel are all excluded as trades eligible for EIS. However, researching technologies related to energy production is not excluded. 

For a full list of disqualifying trades, check out the vcm manual. 

How Much Can I Raise Through the Enterprise Investment Scheme? 

Investment schemes aren’t unlimited; their purpose is to give your company the boost it needs to speed up growth on its own, so the amount of investment acquirable through EIS is capped. This is the case for all government investment schemes for small businesses. 

Your company cannot acquire more than £5 million in investments through EIS in any year-long period (12 months), and can’t raise more than £12 million via the scheme over the course of its lifetime. This includes investment received by any of your company’s qualifying subsidiaries and owned businesses. 

What Should I Use EIS Investment Capital For? 

The enterprise investment scheme is based around growing and developing new companies to help them establish themselves in the larger market. The money must therefore be used to grow and develop your business in areas such as its revenue and the number of employees. These changes cannot be impermanent and must be maintained after the investment is used. They must also be self-sustaining after the initial investment, and the company needs to be able to maintain them through revenue. 

What Are the Conditions of the Enterprise Investment Scheme?

For your investors to get tax relief through the enterprise investment scheme, there are a few requirements that need to be met. The first is that your company will use the money for growth and expansion in all areas, but there are a few others that ensure that your company and your investors are treated fairly in the investment market.

• Your investors must be accepting a risk: Investing is a decision that carries risk, whether the investment is subsidised or not. To qualify for the enterprise investment scheme the investor must be taking on a certain level of risk that their investment may not return more than the amount invested. Your company will be assessed for risk-reducing factors that may disqualify you from EIS, such as offering an investor priority over other investors or protecting the investor’s money by prioritising the use of other investments. You will also be assessed for your assets, company structure, your sources of income and several other factors that help determine the risk to investors. 

• Shares offered through EIS must be ordinary shares: They cannot offer additional benefits such as rights to assets or redeemability. You are not allowed to arrange special conditions with your investors such as reciprocal investment agreements, the sale of shares at the end of an investment period, or adjusting the way you spend investment to benefit an individual investor. The investment must also be for commercial purposes and cannot be used as a means to avoid tax. 

How do I Apply for the Enterprise Investment Scheme?

Once you’ve made your decision, you can issue your shares and fill out this form to apply for the enterprise investment scheme. You must provide the following information to HMRC:

• Your financial forecasts, your business plan and the latest copy of your accounts.

• A statement of how your company meets the ‘risk to capital condition’.

• A financial plan stating the amount you plan to spend on which areas of the business.

• The information memorandum given to your investors to outline your fundraising proposal. 

• Details of agreements between shareholders and your company. 

• A comprehensive list of previous venture capital schemes you have been involved in, including the amounts you gained in investment and the dates on which you received it. 

• Any supporting documentation you may have to support your qualification status. 

This list is not exhaustive. To find out more about the documentation you’ll need, have a look at the government’s venture capital scheme guidance page. 

Should I Apply for EIS?

If you believe the enterprise investment scheme is the best investment scheme for you, then yes! The scheme will help you acquire investment in your business that will allow you to grow and expand in areas you would otherwise be limited in. If you have a plan for expanding your company, the scheme can be a great step forward for you.