What is the Enterprise Investment Scheme (EIS)?

Explanation of Enterprise Investment Scheme

The Enterprise Investment Scheme was introduced by the UK Government to help smaller, and early-stage businesses raise equity finance. By offering tax incentives to investors, the scheme aims to make investment in developing companies more attractive despite the higher risks typically associated with early-stage ventures.

Under EIS, individuals invest in newly issued shares in qualifying companies. In return, they may receive a range of tax reliefs, including income tax relief, potential capital gains tax advantages, and loss relief if the investment performs poorly.

Companies must meet certain eligibility criteria to raise funds through the scheme. These criteria relate to factors such as company size, trading activity, and the amount of funding raised under the scheme.

EIS is commonly used by start-ups and growing businesses seeking external equity investment. It is also frequently used by investors who are prepared to support early-stage businesses while benefiting from the tax incentives associated with the scheme. The scheme operates under rules administered by HMRC.

Key characteristics of the Enterprise Investment Scheme

Key characteristics of the Enterprise Investment Scheme include the following:

• It provides tax reliefs to individuals who invest in qualifying UK companies.
• Investments are typically made in early-stage or growing businesses.
• Shares issued under the scheme are newly created equity shares.
• Companies must meet eligibility requirements relating to size, trading activity, and funding limits.
• The scheme is designed to support business growth by encouraging private investment.
• Rules and eligibility criteria are administered by HMRC.

How the Enterprise Investment Scheme works

Enterprise Investment Scheme generally operates through the following process:

• A qualifying company seeks to raise investment through the scheme.
• Individual investors subscribe for newly issued shares in the company.
• The company confirms eligibility under the scheme and issues the relevant tax documentation.
• Investors claim the available tax reliefs through their UK tax returns.

Example of the Enterprise Investment Scheme in practice

A UK technology start-up raises £1 million from individual investors through an EIS funding round. Investors purchase newly issued shares in the company and receive documentation confirming the shares qualify under the scheme. Investors may then claim the available tax reliefs through their self-assessment tax returns.

Related terms

• Venture capital
• Seed Enterprise Investment Scheme (SEIS)
• Capital Gains Tax
• Equity financing
• Start-up funding
• Angel investor
• Risk capital

Common misconceptions about the Enterprise Investment Scheme

1. EIS does not guarantee investment returns; investors remain exposed to the commercial risk of the business.
2. EIS investments are not limited to technology companies; qualifying businesses operate across many sectors.
3. Tax relief under EIS does not remove the possibility of capital loss if the company fails.

Questions about EIS

What is EIS and how does it work?

EIS is a UK government scheme that encourages investment in smaller companies by offering tax reliefs to individuals who buy newly issued shares in qualifying businesses.

Who qualifies for EIS investments?

Individual investors who purchase shares in companies that meet the scheme’s eligibility requirements may qualify for EIS tax reliefs. The investing individual must also meet the scheme’s investor conditions.

How risky are EIS investments?

EIS investments are typically made in early-stage or growing companies, which often carry higher commercial risk than established businesses. The tax incentives are designed to encourage investment despite these risks.

Can an investor lose money with EIS?

Investors may experience losses if the company performs poorly or fails. Although the scheme provides certain tax reliefs, the investment itself remains exposed to business risk.

What tax reliefs are available under EIS?

The scheme provides several tax reliefs, which may include income tax relief on qualifying investments, potential capital gains tax advantages, and loss relief in certain circumstances.