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What tax relief does the Enterprise Investment Scheme offer?

25th October, 2022

The Enterprise Investment Scheme (EIS) is one of four venture capital schemes designed to allow certain types of small, higher-risk, unquoted trading companies to raise capital. Here, Clayton & Brewill provides an overview of what the scheme offers.

What does the Enterprise Investment Scheme offer?

Enterprise Investment SchemeThe EIS offers several forms of relief. Chargeable gains on any asset can be deferred by making a qualifying share subscription. The investment itself can attract income tax relief and a capital gains tax exemption on gains made when the shares are disposed of. Income tax relief is particularly generous, at 30% on investments up to £1 million a year and £2 million a year, if at least £1 million of that is invested in knowledge-intensive companies.

A company must meet stringent conditions for relief to be available to an investor. For example, the investment must generally be made within seven years of the company’s first commercial sale, and the amount of capital raised in any 12-month period is limited to £5 million (£10 million for knowledge-intensive companies).

Companies that can use the scheme

Your company can use the scheme if it:

  • has a permanent establishment in the UK
  • is not trading on a recognised stock exchange at the time of the share issue and does not plan to do so
  • does not control another company other than qualifying subsidiaries
  • is not controlled by another company, or does not have more than 50% of its shares owned by another company
  • does not expect to close after completing a project or series of projects

Your company and any qualifying subsidiaries must:

  • not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards
  • have less than 250 full-time equivalent employees at the time the shares are issued

Companies must carry out a qualifying trade. If part of a group, the majority of the group’s activities must be qualifying trades.

Case study: Inferno Films Ltd

Availability of relief under the EIS was centre stage in a case at the tax tribunal earlier this year. The case was brought to tribunal by Inferno Films Ltd, a film production company based in Wales, which needed funding to make a film.

Enterprise Investment Scheme: Inferno FilmsFor Inferno, the condition under the spotlight was the risk to capital condition. This condition requires the company to use the money for growth and development and stipulates that the investment should entail the risk of the investor losing more capital than they are likely to gain as a net return.

The verdict

HMRC argued that Inferno failed here because it did not have ‘objectives to grow and develop its trade in the long term’. Specifically, it highlighted Inferno’s lack of employees and the fact that it subcontracted many of its activities. It suggested that Inferno was, at best, a vehicle to provide finance for a series of individual projects.

Inferno said its approach conformed to film industry norms and was the only realistic course of action for a small start-up venture. Its argument was upheld by the tribunal, which found that sufficient long-term aims did exist, as evidenced by its commitment to the Welsh film industry.

Get in touch

As well as the points listed above, there is other strict criteria that must be met in order for the Enterprise Investment Scheme relief to be available.

Whether you are an investor or a company looking for inward investment, Clayton & Brewill can help explain venture capital schemes in more detail.

Please call us on 0115 950 3044 or send an enquiry here.

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