The Enterprise Investment Scheme (EIS) was launched in the 1993/94 tax year and since then more than 21,000 companies have benefited. There is currently more than £10.7bn invested in the schemes and this number is set to grow.
EISs are designed in order to help smaller higher-risk companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
The government-designed scheme has seen massive growth in the past decade. According to the most recent data available, in the tax year 2012/13, 2,395 companies raised £1,015m of funds. The previous year 2011/12 saw 2,675 companies raise £1,032m of funds. Since the launch of the scheme, 59 per cent of EIS investment went to companies raising EIS funds for the first time. Table 1 details the growth since the scheme was made available.
Of all investment, the most raised during 2012/13 was by companies registered in London or the south east of England – 67 per cent. Although interestingly, London was the only region of the UK where EIS investment decreased –by 22 per cent compared with 2011/12.
During 2012/13, investors were able to claim income tax relief on investments of up to £1m for the first time, after it was announced in the previous Budget. Investments above the old threshold of £500,000 contributed 15 per cent of the total amount of EIS investment raised on which claims were made.
Seed Enterprise Investment Schemes (SEISs) are slightly different in that they are designed to help the smaller early-stage companies. SEISs are intended to recognise the difficulties which the companies face in attracting investment by offering a tax relief much higher than that offered by existing EISs.
SEISs were only launched in the tax year 2012/13, but have already proved popular. More than 1,100 companies received investment through the scheme and £80m of funds were raised in their first year alone. Companies in the ‘Hi-tech’ sector raised the most – 32 per cent of the total investment under SEISs in the year. According to data from HMRC, the majority of investors claiming income tax relief tended to invest less than £20,000 into companies qualifying for SEIS – 63 per cent of investors. The schemes are also popular in the same region as EISs, with 62 per cent of SEIS investment being made into companies registered in London or the south east of England.
The key benefit of EISs and SEISs is tax relief. Individuals can claim relief at 30 per cent on investment of up to £1m per tax year – this figure was previously £500,000. The relief is available provided the investor is not connected with the company and the shares must be held for a qualifying period of at least three years and up to five years. The income tax relief is the same for SEISs, but rises to 50 per cent on investments of up to £100,000 per year.
The schemes also come with capital gains tax exemption – a gain arising from the disposal of shares for which EIS tax relief was obtained and not withdrawn. They are also subject to loss relief. If shares for which income tax was obtained are disposed of at a loss, less any income tax relief given, it can be set against income instead of against capital gains.
The current tax year has seen some changes in the schemes. From 6 April 2014, SEISs were made permanent. The government also announced companies benefiting from investment via EISs and SEISs (or Venture Capital Trusts) schemes – who were also benefitting from DECC Renewable Obligations Certificates or Renewable Heat Incentive (RHI) subsidies – were excluded from all venture capital schemes.
More recently in the Autumn Statement, it was announced EISs, SEISs and VCTs will no longer be able to invest in renewable energy schemes such as hydroelectric power as of 6 April 2015.
Five questions to ask:
1. Is it right for my client? If your client is looking for income tax relief, an EIS or SEIS is a good place to start looking. But check they are happy with any risks involved.
2. Which scheme is best suited to my client? Both EISs and SEISs are designed for different types of small company. Depending on whether your client is risk averse or not can decide which scheme is best.
3. Am I picking the most cost-effective scheme? Check through details of different schemes thoroughly to see the costs that come with them.
4. Is the time horizon right? Shares must be held for a minimum of three years. Check with your client they are happy with this scale of time before investing any money.
5. Are there alternatives? If your client is looking to reduce their income tax and has no GCT issues, a VCT may be a better investment.
