ENTERPRISE INVESTMENT SCHEME
| The purpose of the Enterprise Investment Scheme (EIS) is to help certain types of small higher-risk unquoted trading companies to raise capital. It does so by providing income tax and CGT reliefs for investors in qualifying shares in these companies.There are really two separate schemes within EIS:
An individual can take advantage of either or both of these schemes.
The Reliefs Available
Income tax relief
Companies must meet certain conditions for any of the reliefs to be available for the investor.
It was confirmed in Budget 2010 that certain changes to the qualifying conditions for the scheme are being made to ensure it continues to meet European State Aid requirements.
In summary the proposed changes are:
Qualifying business activities
A trade will not qualify if excluded activities amount to a substantial part of the trade. The main excluded activities are:
Time period in which the money is invested
In most cases at least 80% of the money must be used within 12 months after the date on which the shares were issued and the remaining balance within the following 12 month period. Where the qualifying business activity has not started:
From 22 April 2009 the time limit for the employment of money invested will be relaxed to two years from the issue of the shares or if later two years from the commencement of the qualifying activity.
How to qualify for income tax relief
Eligibility for income tax relief is restricted to companies with which you are not ‘connected’ at any time during a period beginning two years before the issue of the shares and ending three years after that date, or three years from the commencement of the trade if later.
You can be connected with a company in two broad ways:
In both cases the position of your ‘associates’ is also taken into account.
Size of stake
You will be connected with the company at any time when you control directly or indirectly possess, or are entitled to acquire, more than 30% of the ordinary share capital of the company.
You will be connected with the company if you have been an employee or a paid director of the company.
There is an exception to this rule if you become a paid director of the company after you were issued with the shares.
You must never previously have been connected with the company and must not become connected with it in any other way. Also, you must never have been involved in carrying on the whole or any part of the trade or business carried on by the company.
How to qualify for CGT deferral relief
You can defer a chargeable gain which accrues to you on the disposal by you of any asset. In addition, you can defer revived gains arising to you in respect of earlier EIS, Venture Capital Trust (VCT) or CGT reinvestment relief investments.
There are some restrictions on investments against which gains can be deferred. These are designed, broadly, to prevent relief being obtained in circumstances where there is a disposal and acquisition of shares in the same company.
Receiving value from a Company
The EIS is subject to a number of rules which are designed to ensure that investors are not able to obtain the full benefit of EIS reliefs if they receive value from the company during a specified period. If relief has already been given, it may be withdrawn.
Examples of the circumstances in which you would be treated as receiving value from the company are where the company:
Receipts of ‘insignificant’ value will not cause the withdrawal of relief.
How we can help
It is not possible to cover all the detailed rules of the scheme in a factsheet of this kind. If you are interested in using the EIS please contact us if you need further information about the scheme.
We can advise you as to whether your company has a qualifying trade.
We can also help to guide you through the implementation of a scheme which is suitable for your circumstances so please call Keith Rogers Accountants on +44 (0) 20 3145 0995 so we can arrange a No obligation FREE initial meeting at one of our offices.