Enterprise Investment Scheme: A guide to EIS for startups

Authors:

Caroline Joseph, Lucy Hoyle

|

Read time:

5 minutes

Published date:

14 August 2024

The UK’s Enterprise Investment Scheme provides funding and growth opportunities for early-stage businesses. Find out how the scheme works, which companies qualify and what tax benefits are available for investors.

What is EIS?

The Enterprise Investment Scheme (EIS) is a tax-advantaged funding programme introduced by the UK government in 1994. The scheme encourages investment in early-stage, high-risk businesses by allowing investors to claim income tax relief (up to 30%) and defer capital gains tax.

EIS is one of several venture capital schemes which help to sustain the UK startup ecosystem. In the 30 years since it was launched, the scheme has helped nearly 40,000 startups raise over £20 billion in funding.

EIS rules and limits

There are certain conditions and restrictions that determine whether a company is eligible to receive investment through the Enterprise Investment Scheme.

Company eligibility criteria

To qualify for EIS, your company must:

• Have a permanent establishment in the UK (i.e. a fixed place of business or a UK-based agent)

• Employ fewer than 250 people (full-time)

• Have gross assets worth no more than £15 million (before issuing shares)

• Carry out a qualifying trade

• Not control or be controlled by another company (except for qualifying subsidiaries)

• Not be trading (or planning to trade) on a recognised stock exchange

You’re also required to receive EIS investment within seven years of your first commercial sale, unless your company is eligible for follow-on funding (under condition A of the maximum trading period). If you’ve exceeded this limit, you may be able to raise EIS funding for a new business activity in accordance with condition B.

Gross assets limit

The maximum value of gross assets a company can hold is £15 million before issuing new shares and £16 million immediately afterwards. Note that the £15 million limit excludes any EIS funds received before the shares were issued.

Gross assets include:

• Fixed tangible assets (e.g. machinery or equipment)

• Current assets (e.g. cash or other assets that can be converted into cash within a year)

• Intangible assets (e.g. intellectual property)

Share classes

New shares issued under the Enterprise Investment Scheme must be full-risk ordinary shares that are non-redeemable and carry no special rights to your assets. Investors must pay upfront, in cash, to acquire their shares.

To ensure you act in accordance with the scheme rules, you should avoid certain arrangements when issuing EIS shares, such as:

• Guarantees on the investment or risk protection for investors

• Opportunities to sell the shares at the end of, or during, the investment period

• Business activities structured to benefit an individual investor (in a way not intended by the scheme)

• Reciprocal agreements to secure tax relief for yourself by investing in another investor’s company

• Plans to raise money for the sole purpose of avoiding tax

Fundraising and spending requirements

Companies can raise a maximum of £12 million through venture capital schemes – including EIS, the Seed Enterprise Investment Scheme (SEIS), Venture Capital Trusts (VCT) and Social Investment Tax Relief (SITR). The annual investment limit from these sources is £5 million, which includes funding received by any subsidiaries or acquisitions.

EIS investment must be used within two years of receiving the money, in order to:

• Grow your own business (rather than acquiring another company)

• Carry out a qualifying trade, prepare to start a new qualifying trade (within two years) or conduct research and development work that will lead to a qualifying trade

Certain trades don’t qualify for EIS – such as banking, insurance, financial services and property development. You can find a full list of excluded activities in the HMRC venture capital schemes manual.

Different rules for knowledge-intensive companies (KIC)

Since 2018, knowledge-intensive companies (KICs) have been able to raise funding through EIS with less restrictions than other businesses. The total EIS investment limit for a KIC is £20 million, which is capped at £10 million per financial year. Note that this includes money raised through other venture capital schemes.

Your company (and any eligible subsidiaries) must meet the following criteria to qualify as a KIC:

• Permanent establishment in the UK

• Fewer than 500 full-time employees

• Working to create intellectual property

• 20% of your workforce has been carrying out research for at least three years

Standard EIS rules vs. limits for KICs

Risk to capital

HMRC brought in the risk to capital condition in 2018 for EIS qualifying companies. This means you need to provide evidence that:

• EIS funding will be used to grow and develop your business in the long term

• Investors are putting their capital at risk by investing in your company

To determine whether your company meets this condition, HMRC will also consider your:

• Sources of income

• Assets

• Company structure

• Use of subcontractors

• Approach to advertising the investment opportunity

• Relationship with other companies

Your company won’t meet the risk to capital condition if you have any arrangements designed to reduce risk, such as allowing an investor to take priority over other investors, withdraw their money as soon as possible or protect their money from being used first.

EIS tax relief

Investors are attracted to EIS qualifying companies because the scheme offers several tax breaks as a reward for supporting less established businesses. If they are eligible, individual investors can benefit from:

• Up to 30% income tax relief on a maximum investment of £1 million per year (or £2 million if investing in a KIC)

• No capital gains tax (CGT) when selling EIS shares held for at least three years

• Deferral relief on the gain from any asset sold in order to buy EIS shares

• Inheritance tax relief on EIS shares held for two years or more

• Loss relief on shares sold for less than the purchase price

Applying for EIS Advance Assurance

If you’re planning to raise funding through EIS, securing Advance Assurance from HMRC can help you attract potential investors. As the first step in the EIS application process, Advance Assurance indicates that an investment in your company is likely to qualify for EIS tax relief. However, it doesn’t guarantee an investor’s eligibility.

Next steps after raising EIS funding

After you’ve received investment and carried out a qualifying business activity for at least four months, follow these steps to ensure your investors can claim EIS tax benefits:

1. File a compliance statement (EIS1) with HMRC for each new share issuance

2. Receive your letter of authorisation (EIS2) and unique reference number

3. Give investors a compliance certificate (EIS3) containing your reference number

4. Continue to follow the scheme rules for at least three years after receiving investment

From Advance Assurance to EIS3 certificates, find out how Carta’s suite of tools and services can speed up your fundraise.

Author: Caroline Joseph

Caroline Joseph is a marketing manager at Carta, representing international markets. Prior to Carta, she worked in campaign marketing and communications for a range of businesses, helping to promote tech solutions to global intersectional issues – such as the climate and female health.

Author: Lucy Hoyle

Lucy Hoyle is a Senior Content Engineer at Carta. She oversees editorial processes, AI search optimization (AEO) strategy and the use of AI to optimise marketing systems. She previously supported Carta teams in Europe, Asia-Pacific and the Middle East with localised content and international SEO.