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Enterprise Investment

Scheme (EIS)
The Enterprise Investment Scheme (EIS) offers tax In addition, if an investor sells their EIS qualifying shares
incentives to individuals investing in small and medium-sized within three years of issue, then any gain ceases to be
trading companies. The purpose of the scheme is to help exempt from capital gains tax.
those companies which might otherwise struggle to raise
finance. Are there restrictions on who can be a
This note covers the basics of how the scheme works, what
qualifying investor?
tax relief is available and who can qualify for the scheme. It As the purpose of the scheme is to incentivise external
reflects the law and practice as applicable at June 2016. investment in high risk trading companies, the scheme
is not generally available to directors and employees of
How does the scheme work? those companies. However, in recognition of the fact that
The scheme provides income tax and capital gains tax reliefs companies qualifying for EIS can often benefit from the
for individual investors who subscribe in cash for ordinary business experience of their investors, there are some
shares in qualifying companies. exceptions for existing directors who do not receive salary
from the company and new directors (e.g. angel directors)
Income tax who have not prior to their investment been involved in the
For shares issued on or after 6 April 2011, an investor who companys trade. Complex rules apply to these exceptions.
qualifies for the relief can claim an income tax reduction There are also limits on the size of shareholding that an
equal to 30% of the money subscribed. The relief is subject investor can take. EIS relief is not available to investors that
to an annual subscription limit, currently 1,000,000, giving a hold (directly or indirectly) more than 30% of the companys
maximum tax reduction per tax year of 300,000. ordinary share capital or voting rights.
For example, if an investor subscribes 50,000 for shares
and claims EIS relief, he or she can deduct 15,000 from
Which companies qualify for EIS?
their income tax liability for the tax year (although EIS relief The scheme is only available to companies which meet certain
can only be used to the extent that they have an income tax qualifying conditions, the purpose of these conditions being to
liability, it cannot create a loss or a repayment of tax). Relief restrict the scope of the scheme to those companies which
can be carried back in whole or part to the previous tax may otherwise struggle to secure financing. The conditions
year, subject to the same investment limit for that year, to include:
accelerate relief for the taxpayer.
a) the company must have a UK permanent establishment
Capital gains tax (i.e. it need not be a UK company issuing the shares);
Provided the shares have been held for the requisite period of b) the company must carry on a qualifying trade on a
time (which is discussed later in this note), any gain made by commercial basis. Companies carrying on certain excluded
the investor on a disposal of EIS qualifying shares is exempt activities, including (amongst others) dealing in land,
from capital gains tax. property development and banking are not eligible for the
scheme;
There are also special rules which allow losses incurred on
the disposal of EIS qualifying shares to be set against an c) the company must not be listed on a recognised stock
investors income tax liability (net of income tax relief at exchange (although a company quoted on the Alternative
investment). Investment Market can continue to qualify for the scheme);

How long do the shares have to be held for? d) the company must not be controlled by another
company;
To benefit from full income tax relief, EIS shares must be
(broadly) held for at least three years after the date of their e) the company must have gross assets of no more
issue. If an investor disposes of EIS shares within three years than 15 million before the investment and 16 million
of their issue, then the EIS income tax relief is withdrawn by immediately after the investment; and
reference to the proceeds that the investor receives. f) the company must have fewer than 250 full time
The effect of this is that, if an investor sells his EIS qualifying employees.
shares within three years of their issue for an amount equal Under changes introduced to the regime in late 2015, the
to or greater than the money he subscribed for them, his EIS above employee threshold is increased for knowledge
relief would be fully withdrawn. intensive companies to 500. Knowledge intensive companies
are, broadly, companies for which R&D spend constitutes a uu require that all investors are independent from the
specified proportion or greater of their total operating costs company at the time of their first EIS, SEIS or share issue
and for which either (i) the majority of their business will (excluding founder shares) this effectively means that
involve exploiting IP generated within the business or (ii) 20% any external investor seeking EIS relief must either have
or more of their workforce has a higher education qualification no existing shareholding or have obtained SEIS or EIS
and is involved in R&D. relief in relation to any existing holding; and
In addition, companies can only raise a maximum of 5 million uu prevent the use of EIS funding to fund a business
in aggregate under the EIS, the Seed Enterprise Investment acquisition.
Scheme (SEIS), the Venture Capital Trust Scheme (a
In addition, it has been announced that (to comply with EU
separate scheme which provides tax benefits for indirect
State aid requirements) EIS relief will only be available for
investment in small trading companies through a form of fund
investments made before 6 April 2025. However, it is possible
known as a Venture Capital Trust) and certain other State aid
that this long-stop date for EIS will be extended by future
investments on a rolling 12 month basis. Under new changes
agreement with the EU. In addition, given that many of the
introduced in late 2015, when testing this 5 million threshold
additional restrictions introduced into the EIS rules in recent
it may also be necessary to take into account investments
years have been driven by the need to secure EU approval
within these categories into certain other companies, including
of compliance with State aid rules, the operation of the rules
companies acquired by the company now issuing EIS shares
could also change in the event of a BREXIT.
and companies, that have sold business assets to the company
now issuing EIS shares. Lastly, in late 2015 the previous requirement that 70%
of any funds raised under SEIS had to be spent by the
Although EIS is generally available only in relation to issues of
company before it could issue shares under EIS was repealed.
ordinary shares, shares carrying certain limited preferential
Accordingly, joint SEIS / EIS funding rounds are now possible
rights (not including preferential rights to assets on a winding
(although care must still be taken to ensure separation of
up, cumulative dividends or dividends where the amount or
the SEIS and EIS share issues and receipt of monies by the
timing of the dividend depends on a decision of the company
company).
or another person) may qualify for EIS.
A no disqualifying arrangements anti-avoidance rule applies Key contacts
to issues of EIS shares. The rule excludes any arrangement
from qualifying for relief if it is entered into with the purpose of
ensuring that the relevant tax relief is available AND either, (a)
all or most of the monies raised are to be paid for the benefit
of a party to that arrangement, or, (b) it would be reasonable Peter Jackson Robert Young
to expect that, absent the arrangement, the business would be Partner, Partner,
carried on as part of another business. In the latter case, this Tax and Incentives Tax and Incentives
+44 (0)20 7300 4721 +44 (0)20 7300 4201
means that a structure to separate part of an existing business p.jackson@taylorwessing.com r.young@taylorwessing.com
(that would not qualify) so that investment into that part,
taken alone, can qualify for relief is no longer effective.

New rules
In addition to the revisions to existing conditions mentioned James Stewart Eithne James
Senior Associate, Associate,
above that were introduced last year, some entirely new Tax and Incentives Tax and Incentives
conditions have also been introduced. These rules: +44 (0)20 7300 4865 +44 (0)20 7300 4890
j.stewart@taylorwessing.com e.james@taylorwessing.com
uu require that companies must be less than 7 years old
(10 years old for knowledge intensive companies) when
receiving their first EIS investment (unless the investment Taylor Wessing LLP reacts very quickly to
will lead to a substantial change in the companys activity); find feasible solutions to complex
uu introduce a 12 million cap on total investment received situations.
under the tax-advantaged venture capital schemes
Legal 500 2014
(increased to 20 million for knowledge intensive
companies);
uu require that all investments are made with the intention to
grow and develop a business;

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Taylor Wessing LLP 2016
This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessings international offices offer clients integrated
international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with high-level
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