WHAT IS AN Enterprise Investment Scheme or EIS
Enterprise Investment Scheme or EIS is a term that refers to an investment program in the United Kingdom that makes it easier for smaller, riskier companies to raise capital.
BREAKING DOWN Enterprise Investment Scheme or EIS
The Enterprise Investment Scheme helps riskier companies by giving their investors federal tax relief, which acts as an incentive to investors, making the potential purchase of those companies’ shares more appealing. The Enterprise Investment Scheme works by granting 30 percent of what the investor pays for the shares as a credit that then reduces the investor’s individual income tax owed for the year that the individual purchased the shares. The maximum amount of relief a taxpayer can claim annually is £300,000 or total tax liability, whichever is less. In addition to the tax credit, the EIS also eliminates the capital gains tax on those shares when the individual decides to sell said shares. Interested investors can purchase shares of the qualifying companies from them directly or through an EIS fund.
How to Qualify for the Enterprise Investment Scheme Tax Relief
In order to qualify for the tax relief, both the companies and their investors must follow many specific regulations. The extensive EIS regulations are meant to prevent companies and investors from abusing the law and subverting its goal of encouraging small business investment. One of those regulations requires investors to pay for the shares at the time they receive them. Shares issued without payment or with delayed payment are ineligible for EIS tax relief. Investors must hold the shares for at least three years and shares purchased must be ordinary shares that do not preferentially protect the investor from the risks of investing in the company.
The EIS does not allow any arrangements made solely to provide tax relief. For example, the EIS would restrict investor A from investing in investor B’s company on the condition that investor B invests in investor A’s company in return. The EIS also excludes individuals with controlling financial interest in a company from receiving tax relief. Partners, directors or employees of a company are also excluded. The EIS allows an exception which applies to angel investors. Angel investors are investors in small startups or entrepreneurs and are commonly an entrepreneur's family and friends. Many consider angel investing to be investing in the entrepreneur starting the business rather than the viability of the business itself; thus, many consider angel investors the opposite of venture capitalists. In order to claim the tax benefits of EIS, taxpayers must receive Form EIS3 from the company. If the company loses its qualifying status, the investor also loses their claim to tax relief, despite having no control over the company’s decisions.