EIS – the Enterprise Investment Scheme explained

Unlike its sister programme SEIS (the Seed Enterprise Investment Scheme), which supports startups and very new businesses, EIS supports larger and more established organisations – those with up to seven years trading history and 250 employees. (See the full list of rules and conditions). Businesses seeking to raise capital with EIS should first secure proof of their eligibility for the scheme by obtaining Advance Assurance from HMRC. This will assure investors that the company they are investing in is eligible for the scheme. If it’s not, they will not get their tax breaks. Individual or corporate investors can invest up to £1 million per tax year and the company can accept up to £5 million per tax year and no more than £12 million EIS funding total.

EIS has different criteria for Knowledge Intensive Companies – (KIC) – which are typically those with high research/development costs and requirements. These companies can accept EIS funding within ten years of trading and may have up to 500 employees. Individual or corporate investors can invest up to £2 million per tax year in KIC businesses which may accept up to £10 million per tax year and up to £20 million EIS funding total.

In both cases, only individual, private investors may claim a tax break. Corporate investors may invest under EIS, but they are not eligible for tax relief.

Companies can use EIS if they:

• Have a permanent establishment in the UK
• Are not trading on a recognised stock exchange at the time of the share issue and do not plan to do so
• Have been trading for less than seven years, (ten years with KIC)
• Have no more than 250 full-time employees at the time the new shares are issued, (500 employees with KIC)
• Do not control another company other than qualifying subsidiaries
• Are not controlled by another company, or do not have more than 50% of their shares owned by another company
• Do not expect to close after completing a project or series of projects
• Do not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterwards

Additionally, investments must be used for a qualifying trade. Most trades are eligible for EIS, but companies may not qualify if more than 20% of their trade includes things like:

• Coal or steel production
• Farming or market gardening
• Leasing activities
• Legal or financial services
• Property development
• Running a hotel
• Running a nursing home
• Generation of energy, such as electricity and heat
• Production of gas or other fuel
• Exporting electricity
• Banking, insurance, debt, or financing services

If in doubt, register with Swoop to find out if your trade is eligible for EIS.

There are different investment limits for companies that qualify as Knowledge Intensive (KIC) and those that don’t:

Non-KIC companies:

• Investors may each invest up to £1m per tax year
• Company may accept up to £5m per tax year
• Company may accept up to £12m total

KIC companies:

• Investors may each invest up to £2m per tax year
• Company may accept up to £10m per tax year
• Company may accept up to £20m total

In addition to the rules on eligibility and investment limits (see above), companies seeking fresh capital using EIS must also ensure:

• The investment is not used for prohibited purposes, (see below)
• The investment poses a risk of loss of capital for the investor, (also known as ‘risk to capital’)
• The investment must be spent within 2 years of the investment, or if later, the date the company started trading
• The company must follow the scheme rules for at least 3 years after the investment is made – otherwise tax relief will be withdrawn from investors
• The shares the company issues for EIS investment must be full-risk ordinary shares which are not redeemable and carry no special rights to company assets
• Issued shares must be paid up in full, in cash, when they’re issued
• The company should have a way to accept payment before shares are issued

EIS offers two key benefits to companies:

• Generous tax relief makes an investment pitch more attractive to potential investors
• It can help companies avoid incurring debt to fund their future growth

EIS can take your investment pitch from just one of many to one of a kind. Register to speak with an EIS expert and find out how to make your pitch stand out.

Almost anyone can invest in EIS-supported companies and there are few restrictions on their investors. However, to claim EIS tax relief an investor must:

• Be liable to pay UK taxes – which may also apply to some non-UK residents

• Not already hold shares in the company that are not SEIS or EIS shares, except for subscriber shares
• Not be an employee, or a director of the company, unless complex Business Angel rules apply
• Not, together with their ‘associates’, hold more than 30% of the company (associates are business partners, spouses, lineal relatives, but not siblings)

EIS offers substantial tax relief to individual but not corporate investors. The tax breaks come in four flavours.

• Income tax relief: Up to 30% income tax relief on investments up to £1 million, or up to £2 million if invested in knowledge-intensive companies (KIC). Note that EIS allowances are allocated individually. This means a married couple could separately invest up to £2 million each tax year and both would be eligible for full Income Tax relief
• Capital gains tax disposal relief: Any gain is capital gains tax (CGT) free if the investment is held for at least three years
• Capital fains tax re-investment relief: All capital gains tax can be deferred if the gain is re-invested in EIS-qualifying shares
• Loss relief: If the shares are disposed of at a loss, (or if the company goes bankrupt), investors can set the loss against any income tax due for that year or the previous year
• Additionally, shares purchased using EIS and held for at least two years, are exempt from inheritance tax if they are passed along via will or probate

EIS rules state that invested funds must be used to grow and develop the business. Although this broad description may indicate many ways to spend the cash, there are restrictions on usage:

• Funds cannot be used to acquire assets or another company; this includes a trade, intangible assets, and goodwill
• The company cannot use the investment to repay any current or outstanding loans
• The company cannot use EIS monies to pay cash out to shareholders
• The investment cannot be used to acquire assets that can be resold by the company with little to no variance from the purchase price if the company were to fail. (Such as real estate)
• The company cannot use the investment to purchase land or finance the entirety of a land lease   
• Where 20% or less of a company’s overall trade is excluded, EIS investment cannot be used by this excluded trade
• Production companies cannot use the investment to finance a film. The investment must be used to grow and develop the company’s internal infrastructure

The scheme may seem complex, but the core elements are quite simple. For the investor, EIS works like this:

By now you know that the Enterprise Investment Scheme supports larger and more established businesses – those with up to seven years trading history and 250 employees. The Seed Enterprise Investment Scheme (SEIS), however, targets investment for early-stage companies – those with less than three years trading history and 25 employees. Individual investors (no companies) can invest up to £200,000 in an SEIS business per tax year, and SEIS companies can accept no more than £250,000 SEIS funding total.

Read more: our in-depth comparison of SEIS and EIS.

Investors seeking to invest in EIS need to know the company they are investing in is eligible for the appropriate scheme. If it’s not, they won’t get their tax breaks. Businesses can obtain proof of their eligibility for EIS by seeking Advance Assurance (AA) from HMRC. (Advance Assurance will not tell the company if an investor is eligible for EIS).

Applications for AA can be filed by the company secretary, a director, or a trustee if the social enterprise is a charitable trust. They will need to provide details of potential investors as well as the following:

• Forecast of how much money the company hopes to raise
• Business plan and financial forecasts
• A copy of the latest accounts if available
• List of which companies will use the investments
• Details of all trading and activities to be conducted, plus an estimate of how much the company expects to spend on each activity
• A list of any amounts, dates, and venture capital schemes under which the company has previously received an investment
• Up to date copy of the memorandum and articles of association and details of any changes the company expects to make
• A copy of the register of members from the date of application for Advance Assurance
• Latest draft of any documents used to explain the investment proposal to potential investors.(Company ‘pitch’ document).
• Details of any other agreements between the company and the shareholders or VCT
• A signed letter from one director or trustee if the company is allowing an agent to act on their behalf
• A completed checklist for EIS with the Advance Assurance application form
• Any other documents to show the company meets the qualifying conditions for the EIS

HMRC will contact the applicant after they have made their decision. If their answer is positive, they will provide a statement that says the investment is likely to qualify for EIS. This can be shown to potential investors. Note the word ‘likely’ in HMRC’s statement. It is an indication of eligibility, not a cast-iron guarantee. If HMRC declines to offer EIS, they will usually say why. The adjudication process can take up to eight weeks.

Read more: our in-depth Advance Assurance (AA) guide.

An EIS compliance statement, (known as EIS1), is a form that must be completed by the company and sent to HMRC after the issuance of EIS shares. Without this form, investors cannot claim their tax relief. EIS1 lists the investors who have requested EIS3 or EIS5 certificates to claim tax relief and contains a declaration that, as at the time of the form’s completion, the company has met the requirements for EIS and that it will continue to meet all requirements of the scheme for the relevant period.

Companies must submit an EIS1 compliance statement within either two years from the date on which the company had been conducting its qualifying business activity for four months, or within two years of the end of the tax year in which the shares were issued (whichever is later).

Firstly, there’s the yawning gap between the investment caps on both schemes. EIS will allow up to £2 million investment per investor, per tax year, whereas VCT will allow only £200,000 per investor, per tax year. However, beyond the numbers, the biggest difference is in the management of the investments.

With EIS, the investor is largely on their own. They pick the company, they allocate their funds, they observe the performance of their investment, and they make the call on when to exit from the opportunity. It’s a hands-on affair. Alternatively, with VCTs, the investor places their funds in the care of a Venture Capital Trust – an investment company listed on the stock exchange that buys shares in high potential, unquoted businesses. Think of VCTs as adventurous money managers – they seek high-potential investments, allocate client funds to those opportunities, observe progress, and then decide when to step out of the deal. Apart from choosing their fund manager, the investor does very little with a VCT. They still invest in high potential businesses, but most of the footwork and paperwork is done for them – and of course, they pay management fees for the convenience. According to the Government, there were 40 active VCTs in the UK raising funds and 57 VCT’s managing funds in 2020/21.

In addition to the fact that EIS will allow ten times the investment compared to VCT, and that one scheme is fully managed and one is not, there are other differences in the structure of the schemes:

For companies seeking funds, EIS presents a direct path to the investor, but that also brings the headache of finding those investors and presenting an investment case that may not be so easily understood by non-professionals. (However, it is worth noting that VCTs can be picky about the companies or sectors they invest in. It may not be easy for some businesses to secure the backing of a VCT for their funding needs). Additionally, EIS may mean the company has to deal with more investors (and their demands) than they would with VCT, where the fund acts as the go-between the company and the investors. VCTs may also bring experienced venture-capital managerial support to the deal that could give the business an unexpected boost.

For investors, the choice between EIS and VCT comes down to personal goals. Those with a larger investment and risk appetite and who may wish to cash out after three years instead of five years with VCT, may consider EIS as their best option. EIS also offers income tax carry back and capital gains tax deferral – useful options for those trying to limit their tax exposure.  Alternatively, those who prefer the ease and reassurance of full funds management, and like the idea of immediate capital gains tax exemption and their annual dividends paid tax free may find VCT their best investment choice.

Read more: our in-depth VCT vs. EIS guide.

These are terms for the EIS status of a company’s investment proposal (pitch).

• ‘EIS pending’ means the company has applied to HMRC for EIS Advance Assurance but is still waiting to receive written confirmation. In this situation, confirmation of whether the company has received Advance Assurance will typically be given to investors in the statutory cooling off email sent after the pitch closes.
• ‘EIS partial’ means EIS is available for a portion, but not all, of the raise. For example, if a business raising £1,000,000 might have only £300,000 of that raise as EIS-eligible, then the pitch document will display ‘EIS Partial.’

Yes and no. It’s a question of payment. For EIS, individuals cannot claim tax relief if, at the time the shares are issued, they’re a paid director of the company, unless their payment is a ‘permitted payment’. A permitted payment may be:

• Reimbursement of work-related expenses.
• Reasonable interest on loans to the company.
• Dividend which does not exceed a normal return on the amount invested.
• Payment for supplying goods at their market value, (no profit).
• Payment of reasonable commercial rent.
• Reasonable payment for services provided within their trade or profession, other than secretarial, managerial, or similar services to the company – these must be included in their accounts for tax purposes

Directors may also be able to claim tax relief if, at the time the shares are issued, they:

• Are an unpaid director of the company (and are not entitled to any payment)
• Have not previously been involved in the same trade that the company is seeking investment for.

If you become a paid director, you can keep any income tax relief you previously received. You can also claim tax relief under EIS after becoming a paid director if either you were:

• Issued shares before you became a paid director, and any new shares are issued within either three years of the original share issue or the date the company started trading
• Issued with SEIS shares while you were a paid director of the company, and the new EIS share issue is within three years of the SEIS share issue.

Assuming HMRC agrees that the company and investments are eligible for EIS tax relief, the company will receive EIS3 certificates for each investor. These documents carry a unique investment reference number (UIR). 

To claim EIS tax relief on a self-assessment tax return, the investor will need to enter details of each investment in the ‘Any other information’ section of their tax return. The details required for each investment are:

• The UIR number as shown on the EIS3 certificate.
• The name of the company invested in.
• The amount on which they’re claiming relief for this year.
• The date of issue of the shares.