New EIS rules causing headaches for crowdfunding
What is EIS?
The Enterprise Investment Scheme (EIS) is a valuable relief which potentially grants 30% income tax relief to investors subscribing for new shares in certain unquoted trading companies. There are also Capital Gains Tax reliefs allowing investors to roll over other gains into the EIS investment, and allowing the EIS shares to be sold free of CGT if they have been held for at least three years and all of the conditions have been met.
Upcoming changes to EIS
EIS has been invaluable in crowdfunding and other forms of equity fundraising as the tax reliefs make the investment much more attractive to investors. However, various changes came into effect from 18 November 2015 and one in particular is causing difficulties; the “permitted maximum age requirement”. Under this the “first relevant commercial sale” must have been made within seven years before the investment (or ten years for “knowledge intensive companies”). This period is known as the “initial investing period” and this essentially rules out companies that have been running for longer periods. Sadly there have been many cases in the past where such companies have successfully raised funding under EIS.In addition the seven years is applied to situations where other companies had been running the same trade. So if the trade was actually acquired from another company, perhaps being bought out of a liquidation for example, the seven year rule may be broken even if the company itself is very new. In the past there have been businesses rescued by EIS finance that have gone into a new company that has acquired the trade.
Fortunately, there are two main exceptions to the rule:-
- Companies who benefitted from EIS (and certain other) investments within the initial investment period. These companies will be able to continue to raise EIS funds indefinitely. Unfortunately this would not apply to a company which has raised EIS funds in the past under the old rules, but after the expiry of the newly defined initial investing period;
- Companies who raise (within a 30 day period) a sum which is more than 50% of the average annual turnover for the past five years based on a business plan prepared in view of entering a new product or geographical market.These will cover a lot of scenarios, but there will still be companies who will miss out, or who will need to adjust their plans so that they do qualify. It will be important to realise this at an early stage and plan accordingly.
How HMRC can help
Those companies who might be caught by the rules may do well to take advantage of HMRC’s advance assurance service, getting their confirmation that the company is a qualifying company. This will help to gain investors’ confidence. However, it will be vital that the company’s case is put forward carefully explaining exactly why the directors believe they can satisfy all of the rules, with sufficient reference to business plans and other evidence.
Other changes to EIS
Other changes include:-
- An end date on EIS of 2025;
- A tightening of the investor independence requirement so that prior to the qualifying investment the investor can only hold founder shares or shares acquired under a risk finance incentive (such as EIS);
- The £5m annual limit on state aided schemes now includes subsidiaries and acquired trades;
- A new £12m total limit on relevant investment raised by company (£20m for knowledge intensive companies);
- The money raised cannot be used to fund an acquisition;
- The maximum number of employees is increased to 500 (from 250) for knowledge intensive companies.
We at Ensors are here to help and provide guidance.« Return to Briefings
For more information on this issue please speak to your normal Ensors contact, or speak to any member of the Corporate and Business Tax Team.