EIS provides very attractive tax breaks, but its complexity and focus on early stage companies’ means that it is primarily suitable for investors who have an appetite and understanding of higher risk investments.
To compensate for taking on more risk, the government offers EIS investors tax breaks on three fronts: income tax, capital gains tax, and inheritance tax. As might be expected, the qualifying conditions are rigorous. However, the most recent Budget has brought in various proposals to the regulations, the details of which are as follows:
The timing of investment has changed. In order to comply with European law, the qualifying companies must be less than 12 years old when receiving the first EIS or VCT investment. There is an exception, where the investment leads to a ‘substantial change’ in the company’s activities. In order for the significant-change test to be met, the EIS investment must be over 50% of turnover averaged over the five preceding years.
Enterprise investment scheme rules
There are also proposed changes to the rules regarding advance assurance from HMRC that the investment qualifies for EIS. HMRC will no longer provide advance assurance where companies have already received more than £10 million risk finance investment funding, or where they are over seven years old and have not previously received risk finance investment.
The government has issued other minor changes. For example, the total investment that a company can receive under EIS (and VCT) is restricted to £15 million. This goes up to £20 million for “knowledge intensive” companies – which broadly means that in at least one of the three years prior to EIS investment, the company has either:
- Spent at least 15% of operating costs on Research and Development or innovation; or,
- In each of those three years has spent at least 10% on R&D or innovation.
In addition, one of the following conditions needs to be satisfied:
- At least 20% of the company’s number are skilled, which means they have higher educational attainment; or
- The company is engaged in the creating of intellectual property which will form the greater part of the business.
Whilst EIS remains attractive for individuals seeking a tax-incentivised investment, or else companies looking for outside investment, the rules remain complex and it is easy for the unwary to be tripped up. Seeking professional advice at the outset is essential.