ENTERPRISE INVESTMENT SCHEME (EIS) - MAKE SURE YOUR CLIENT DOESN'T MISS A TRICK!
A lot of start-up businesses are rightly involving their lawyers at the outset of their ventures. Corporate and Commercial lawyers are perfectly placed to give new businesses guidance on how to get off on the right foot.
From the outset businesses are considering their incorporations, shareholders and directors arrangements, employee terms, contractual terms and conditions etc.
However, one of the very first things that should be considered in detail is the method of financing the business. Typically, this will involve the owner investing some capital in return for the issue of shares in the company with perhaps some additional funding being obtained by way of debt finance.
It is the investment of capital in return for shares that this article focuses on, as this is the point at which many start-up businesses can take advantage of the EIS or SEIS schemes.
Both of these arrangements are government schemes aimed at encouraging the creation of new businesses through tax incentives.
These incentives can be summarised as follows:
- Income Tax Relief: Relief is given to the investor for 30% of the value of the investment against that investor’s income tax liability for the last year. Relief can be claimed up to a maximum of £1M invested giving a maximum tax relief of £300,000. This is very attractive to higher rate income tax payers.
- Capital Gains Tax Exemption: Provided the shares have been held for 3 years (and income tax relief was initially claimed) there will be no tax to pay on the gain when sold. This is highly attractive to successful start-up owners who are bought out by larger companies.
- Loss Relief: If the shares are disposed at a loss, the shareholder can elect that the amount of the loss less any income tax relief given can be set against income of the year in which they were disposed of (or previous year).
A combination of these three reliefs makes the EIS very attractive. The Seed Enterprise Investment Scheme (or SEIS) is even more so, as it has 50% Income Tax relief available.
Both of these reliefs require the investors and the investee company to meet certain requirements but they are not onerous for genuine start-ups.
The purpose of this article isn’t to set out all of these conditions but rather to highlight one crucial point and that is simply – don’t let your clients miss the boat.
One of the most common reasons for investments failing to qualify for EIS relief is that the shares are issued to investors without the investors paying for them. This can happen when founder shares are issued on incorporation but the capital is not invested until sometime later when the new company has a bank account.
Corporate lawyers should involve their tax colleagues to assist with the EIS arrangements at the incorporation stage of a new business.