Harper James advises UK businesses on the legal structure and compliance requirements associated with investment schemes under the laws of England and Wales. For companies raising finance, eligibility usually refers to the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), which provide tax reliefs to qualifying investors.
SEIS is designed for smaller, early-stage companies. Eligibility depends on factors including the company’s age, gross assets, number of employees, trading activity and total amount raised under venture capital schemes. The company must carry on a qualifying trade, and the funds must be used for an approved business purpose, such as developing the trade or meeting working capital costs.
EIS applies to a wider range of qualifying companies but still imposes limits on the company’s activities, size, age and fundraising history. Certain trades, including financial services, property development, insurance and some forms of energy generation, are excluded or subject to specific rules. The company must also satisfy conditions concerning its permanent establishment and the use of investment funds.
Investors must subscribe for newly issued shares and hold them for the statutory period to retain the relevant reliefs. The shares generally need to be ordinary shares, fully paid in cash, and not protected by arrangements that remove the investment risk. An investor’s connection with the company is also relevant. Employment, existing shareholdings, loans and other financial interests can restrict eligibility, although specific rules apply to directors and certain types of investment.
The investment must be made for genuine commercial purposes. Investors cannot use arrangements that provide a guaranteed return or an equivalent form of protection from loss. Separate rules govern individuals, trustees and corporate investors, so the investor’s status should be checked before the subscription documents are finalised.
Eligibility is assessed both before and after the investment. A company can seek advance assurance from HM Revenue & Customs before issuing shares, although advance assurance is not a formal approval or guarantee that the conditions will be met. The application normally includes a business plan, financial forecasts, details of the proposed investment and information about the intended investors.
After the share issue, the company must submit the required compliance information and maintain records supporting the qualifying conditions. Investors then use the compliance certificates issued by the company when claiming tax relief. Common problems include using an ineligible share structure, spending funds on non-qualifying activities, issuing shares before the scheme position is reviewed, and failing to monitor the company’s status during the relevant holding period. A properly prepared term sheet, subscription agreement, cap table and compliance record provides the basis for checking eligibility at each stage.