Designed to help small higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies. This scheme is only applicable to specific qualifying industries, exceptions listed below.
- Income Tax
Income Tax Relief is available to individuals only, who subscribe for (although this can be through a nominee), shares in an Enterprise Investment Scheme (EIS). The minimum investment is £500 worth of shares in any one company in any one tax year. From 6 April 2011 relief is at 30 per cent of the cost of the shares (for shares issued on or before 5 April 2011 the relief is 20 per cent of the cost of the shares) to be set against the individuals Income Tax liability for the tax year in which the investment was made.
Relief can be claimed up to a maximum of £500,000 invested in such shares, giving a maximum tax reduction in any one year of £150,000 providing you have sufficient Income Tax liability to cover it.
This relief cannot be set off against dividend income, as the tax credit attached to the dividend is not recoverable.
Generally, these shares must be held for three years from the date the shares were issued tax relief could be withdrawn. Income Tax relief can only be claimed by individuals who are not 'connected' with the company.
- Capital Gains Tax exemption
If you have received Income Tax relief (which has not subsequently been withdrawn) on the cost of the shares, and the shares are disposed of after they have been held for the period referred to above, any gain is free from Capital Gains Tax. If no claim to income tax relief is made, then any subsequent disposal of the shares will not qualify for exemption from capital gains.
- Loss Relief
If the shares are disposed of at a loss, you can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.
- Capital Gains Tax deferral relief
This is available to individuals and trustees of certain trusts. The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.
There are no minimum or maximum amounts for deferral. It does not matter whether the investor is connected with the company or not. Unconnected investors may claim both Income Tax and capital gains deferral relief.
There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.
In order for its investors to be able to claim, and keep, the Enterprise Investment Scheme (EIS) tax reliefs relating to their shares, the company which issues the shares has to meet a number of rules regarding the kind of company it is, the amount of money it can raise, how and when that money must be employed for the purposes of the trade, and the trading activities carried on.
The company must satisfy HM Revenue & Customs that it meets these requirements, and is therefore a qualifying company.
- Must be an unquoted company at the time the shares are issued.
- Must not be controlled by another company (or another company and any person connected with that company).
- There are also various other criteria but these are the main considerations
Limit on money raised
Companies are not allowed to raise more than £5 million in any 12 month period from the venture capital schemes. The schemes are the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). Investments from either of these schemes must fall within the £5 million limit.
Most trades qualify, but some do not. Those that do not are termed 'excluded activities' and are:
|dealing in land, in commodities or futures in shares, securities or other financial instruments|
|operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment|
|operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home|
|Non-core activity||dealing in goods, other than in an ordinary trade of retail or wholesale distribution|
|financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities|
|leasing or letting assets on hire, except in the case of certain ship-chartering activities|
|Intellectual property||receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)|
|Professional Services||providing legal or accountancy services|
|farming or market gardening|
|holding, managing or occupying woodlands, any other forestry activities or timber production|
This guide provides an overview for companies and potential investors. It does not cover all the detailed rules, so companies and investors should not proceed solely on the basis of the information in it, and should consider seeking professional advice.