The Enterprise Investment Scheme (EIS) offers tax relief to investors who subscribe for qualifying shares in eligible UK companies. Harper James advises ambitious businesses on fundraising and the laws of England and Wales, including the legal structure and documentation relevant to SEIS and EIS investment.
An EIS company must generally have a permanent establishment in the UK, carry on a qualifying trade, and remain unlisted on a recognised stock exchange. Its gross assets must not exceed £15 million immediately before the share issue and £16 million immediately afterwards. The company must usually have fewer than 250 full-time employees, or fewer than 500 where it qualifies as a knowledge-intensive company.
The trade must fall within the permitted activities. Excluded activities include many forms of property development, financial services, legal and accounting services, farming, and businesses focused on energy generation or export. The company must also meet age and investment limits. In general, the relevant trade must have operated for no more than seven years, or ten years for a knowledge-intensive company. EIS funding is subject to a £5 million annual limit and a £12 million lifetime limit, with higher limits for knowledge-intensive companies.
EIS shares must be newly issued ordinary shares, paid for in cash and held at risk. They must not normally be redeemable or carry preferential rights to the company’s assets. The investment must be used for a qualifying business activity, such as developing the trade, within the applicable time limit. Arrangements that protect the investor from ordinary commercial risk can prevent relief from applying.
The company should review its cap table, articles of association, business plan, use of funds and investor rights before issuing shares. It can apply to HM Revenue & Customs for advance assurance, which gives an indication of whether a proposed investment is likely to qualify. Advance assurance is not a guarantee, and the company must still satisfy the statutory conditions when the shares are issued.
After the share issue, the company must submit the appropriate compliance information to HMRC. Once HMRC accepts the submission, it can issue compliance certificates, which investors use to claim relief. Investors generally need to hold the shares for at least three years and remain within the connected-person and other eligibility rules. Relief can be withdrawn if the company or investor stops meeting the conditions during that period.
A practical EIS process therefore involves checking eligibility before fundraising, structuring the investment documents correctly, obtaining advance assurance where appropriate, using the funds for the stated qualifying purpose, and maintaining records for the compliance statement. Early review is particularly relevant where the company has existing investors, complex share rights, an earlier SEIS round, or a proposed sale or restructuring.