The Enterprise Investment Scheme (EIS) is a tax relief which enables individual investors to invest in small and medium-sized companies (broadly with up to 250 employees and £15 million of assets for standard qualifying companies seeking capital to fund qualifying trading operations) in return for generous tax reliefs.
The scheme’s most prominent incentives are that an investor can subscribe for up to £1 million (per tax year) of newly issued shares in a qualifying company in return for a 30% non-repayable Income Tax credit and an exemption from Capital Gains Tax, in both cases the shares must be held for at least three years. There is a further Income Tax relief for investment losses if the investee company goes bust.
When the current regime’s predecessor was originally introduced as the Business Expansion Scheme in the early 1980s, the Government at the time publicised the new scheme as being so straight forward, “it was something that even Aunt Agatha could invest in.”
The scope of the EIS was clipped by restrictions brought in from 18 November 2015, which limited investment to companies whose first commercial sale was within the last 7 years, capping total EIS investment to £12 million for standard qualifying companies and blocking non-EIS shareholders from subscribing for new EIS shares going forward. A sunset clause was also imposed, creating a final cut-off point of 6 April 2025 for any more Income Tax relief.
The above restraints were implemented to make the EIS compliant with new European Union State Aid rules. Aunt Agatha would be aghast at the complexity of the current EIS legislation. With the funeral booked for 2025, these restrictions were certainly the first death knell to ring.
There have been recent reports in the national press that the Chancellor, Philip Hammond, intends to restrict the EIS further in the Autumn Budget on 22 November 2017, possibly going as far as reducing the limit and rates of relief, or extending the minimum 3 year holding period. This could well be the tolling of the second death knell.
One restriction being floated is to pull the relief away from asset-rich companies who would have enough collateral to shield themselves from financial risks. This could be put into effect by substantially reducing the £15 million asset limit, introducing an asset class test or by adding to the list of activities that are excluded as qualifying.
The rate of tax relief was increased from 20% to 30% from 6 April 2011. Could this be reversed?
Another report mentioned a plan by HM Treasury to target high-earners ‘abusing’ the EIS. The individual annual investment limit was increased from £500,000 to £1 million from 6 April 2012. Could this also be rolled back? Currently, there is a cap on the level of Income Tax relief for investment losses for non-EIS shares limiting relief to either £50,000 or 25% of income (whichever is greater); this could be extended to include investment losses on qualifying EIS shares.
Whilst it is understandable that the Government is keen to be seen to be targeting the avoidance of tax, one of the purposes of the EIS, as well as helping start-ups to raise finance, is to enable growing companies to scale up, hence its predecessor being called the ‘Business Expansion Scheme’. Hopefully any new restrictions will not stifle new investment and not impact on economic growth.
The recent reports are speculation and we will not know for certain if the EIS will be changed in any way until the day of the Budget. However, any companies currently operating an EIS may wish to consider bringing forward funding rounds and issuing shares before 22 November 2017, whilst the current rules are still at play.
For more information on the Enterprise Investment Scheme please speak to your usual Ensors contact, send us a quick enquiry or email Robert Leggett, Business and Corporate Tax partner.