Smaller companies can struggle to raise capital, as investors are often concerned about the level of risk associated with investments. There is uncertainty in less established businesses; their trajectory isn’t as predictable, they have less access to resources and they are more susceptible to changes in the financial climate. And yet, they can achieve great things given the right opportunity.
For this reason, the UK government introduced two very attractive tax schemes; The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). These are totally legitimate means for your company to attract investors and increase the likelihood of raising money. This week, we take a look at the EIS and help you assess whether the scheme could be beneficial for you.
What is it?
Launched in 1993, the EIS scheme was put in place to make investing in smaller businesses more attractive. Under this scheme, you can raise up to £5 million a year and a total of £12 million in the company’s lifetime. These amounts are inclusive of other forms of investment, so if you have already raised £2.5 million in the current financial year, separate to this scheme, you will only be able to raise £2.5 million under EIS until the end of the year.
How does it work?
EIS offers attractive, totally legitimate tax breaks and credits to investors. Any investor paying into an EIS company will get 30% of their initial investment back as a tax credit. So, if an investor puts £1,000 into your company, they can apply to get £300 back. This means that although their investment is worth £1,000 it has only cost them £700.
Not only this but if the company does well and the shares double in price from £1,000 to £2,000 they don’t have to pay capital gains tax if they decide to sell their shares. So, from their investment of £700, they have made a gain of £1,300 upon which they don’t pay tax (£2,000 new value of the shares minus £700 initial investment equals £1,300).
If the value of the shares stays the same and they sell at £1,000 they have still made a gain of £300 (as they got 30% of their initial investment back) which they don’t pay tax on either. As well as this, if the shares devalue to £700, the investor hasn’t made a loss as this was how much they spent in the first place.
Additionally, if the company goes bust and the shares lose their value, the investor can deduct this loss from their gross income. As an example, say the investor earns £10,000 a month and they pay £40% tax. Their investment of £700 will be taken from their gross pay. This will mean they will only pay tax on £9,300 that month (£10,000-£700 investment loss).
What do you need to qualify?
For both EIS and SEIS, companies must be established in the UK and must not trade on any stock exchange. For EIS, your company must also meet the below requirements:
- You need to have been trading for at least 4 months, but be under 10 years old. (That being said, your first commercial sale must have occurred less than 7 years ago)
- You must have no more than £15 million in gross assets.
- You should have less than 250 employees, of 500 if you meet certain requirements.
- Most trades qualify for the scheme, but for a list of exceptions click here.
It is vital for small companies to lower the risk of investing, so they can attract investors and raise the money they need. A 2014 government report indicated that since EIS was introduced, over 21,000 companies have received investment through the scheme and over £10.7 billion of funds have been raised. Unique to the UK, EIS is a very beneficial scheme which can help entrepreneurs raise the money they need to achieve the growth of their dreams.
Next week, we take a look at SEIS, a scheme offering even more attractive tax credits to earlier stage companies. Find out if you qualify by tuning in next week…