What is the Enterprise Investment Scheme?

Learn everything there is to know about the Enterprise Investment Scheme (EIS) right here, including how much money companies can raise and what's in it for investors.

Contents

• What is the Enterprise Investment Scheme (EIS)?
• How does the Enterprise Investment Scheme work?
• EIS funding: How much you can raise
• EIS tax relief for investors
  
  • Income tax
  • Capital Gains Tax
  • Inheritance tax
• EIS eligibility criteria: Who can use EIS?
  
  • EIS-qualifying companies
  • EIS investors
• What's a Knowledge-Intensive Company (KIC)?
• EIS vs SEIS: What's the difference?
• How to get EIS funding
• EIS advance assurance
• Fixed-fee fundraising
• FAQs

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) is a government-backed initiative designed to help businesses in their growth stage attract investment. 

By offering generous tax incentives to investors, the scheme gives scaling businesses like yours a valuable opportunity to secure the funding you need to expand, develop new products, and create jobs.

EIS is the big brother of the Seed Enterprise Investment Scheme; best suited to startups in the very early stages.

Since its launch in 1994, EIS has helped channel billions into innovative and growth-stage businesses, boosting the UK economy. And experts believe that EIS will be even more critical in the years to come - so watch this space!

How does the Enterprise Investment Scheme work?

EIS helps you attract investors by providing them with substantial tax benefits. In exchange, you gain access to critical funding to drive your business forward.

Investors can get 30% income tax relief on investments of up to £1 million annually (or £2 million if your business is a Knowledge Intensive Company (KIC).

On top of that, they can benefit from capital gains tax exemptions and inheritance tax relief, making your business more appealing for long-term investment.

EIS funding limits

Of course, what you really want to know is how much money you can raise with EIS!

Under EIS, your business can raise up to £5 million per year and £12 million in total over its lifetime. If your business is a Knowledge Intensive Company (KIC), the lifetime cap increases to £20 million.

But it’s not just about the amount. There are rules on how you can use the funds.

EIS investments should go towards growth activities like hiring staff, product development, and marketing. What you can’t do is use the money to acquire another company or pay off debts.

These funding limits are designed to give growth-stage businesses a serious boost, helping you accelerate your plans, expand operations, and compete in your market.

EIS tax relief for investors

Here's how the investor can benefit from EIS:

• Income tax relief: Investors can claim income tax relief on 30% of their original investment.
• Capital gains tax relief: If they hold EIS shares for at least three years, any profits from those shares are tax-free.
• Capital gains deferral: Investors can defer a taxable gain by reinvesting it into your business through EIS. The gain stays deferred for as long as they hold the EIS shares and can continue to be deferred if reinvested into future EIS opportunities.
• Inheritance tax relief: After two years, EIS shares are exempt from inheritance tax.

Open the tab below to see how this might work in practice.

EIS eligibility criteria

There are a few restrictions for companies and investors alike. However, EIS is not as restrictive as many founders think.

To qualify for EIS, businesses must:

• Be less than seven years old (10 years for KICs) from the date of your first commercial sale.
• Have fewer than 250 full-time employees (500 for KICs).
• Have a permanent establishment in the UK.
• Not be controlled by another company (the investment must be made directly into the TopCo).
• Carry out a qualifying trade (some trades, like finance and property development, are excluded).
• Not control a company/subsidiary that doesn't carry out a qualifying trade.
• Not be trading on a public stock exchange.
• Not exceed gross assets of £15 million at the time of investment.

Unlike SEIS, previous EIS or Venture Capital Trust (VCT) funding is allowed, but cumulative funding limits must not exceed £12 million (or £20 million for KICs).

It's also worth noting here that if you plan on utilising both SEIS and EIS, SEIS must come first - you can't get EIS funding and then SEIS funding afterwards.

Qualifying trades

Your business also needs to carry out what HMRC calls a “qualifying trade” to qualify for EIS, which the vast majority do. And if your business owns subsidiaries, they too must also engage in qualifying activities.

Even then you don't need to worry unless an excluded trade accounts for more than 20% of your business activities. As so many industries do qualify, it's probably easier to show you a list of those which don't (open the tab below).

As for investors:

• They must be a UK taxpayer.

• Not own more than 30% of the company’s shares or voting rights.

• Not be an employee (although they can be unpaid directors).

• The EIS shares issued must be ordinary shares with no special rights to assets or dividends.

• To maintain tax relief, investors must hold the EIS shares for at least three years.

One more thing...

The risk-to-capital condition

The whole reason EIS exists is to encourage investment in young businesses, which is often a bit of a risk. So under HMRC's risk-to-capital condition:

• Your business must have significant growth potential.

• Investors must face a genuine risk of losing their capital.

What's a Knowledge-Intensive Company (KIC)?

If your business qualifies as a Knowledge-Intensive Company (KIC), under EIS, you could raise even more. KICs benefit from:

• A higher funding cap: You can raise up to £20 million through EIS.
• An extended eligibility period: KICs can access EIS funding for up to 10 years after their first commercial sale.
• A greater team allowance: KICs can have up to 500 full-time employees.

Investors can invest (and claim on) up to £2m each year if at least £1m is invested in KICs.

But to be classified as a KIC, your business needs to meet the operating costs condition AND either the skilled employee condition OR innovation condition: 

• Operating costs condition: Spend 10% of operating costs annually on R&D for 3 years or 15% in any one of those years, either before or after investment, depending on your company’s age.
• Skilled employee condition: At least 20% of your employees must work in R&D roles requiring a Master’s degree or higher for three years after investment.
• Innovation condition: Your company must create intellectual property and expect the majority of its revenue to come from it within 10 years.

Contrary to what you might think, your business doesn't have to be some sort of science hub; R&D covers a broad spectrum. Software and tech companies can qualify as KICs - so it's worth checking! Our quiz will give you a clearer idea.

EIS vs SEIS: The key difference

Both EIS and SEIS can help your business attract investment, but they target businesses at different stages:

• SEIS: Ideal for early-stage startups, offering 50% income tax relief on investments up to £250,000.

• EIS: Aimed at growth-stage businesses, providing 30% tax relief on investments up to £5 million annually.

And remember: SEIS funding must come first. Do check out our SEIS guide if you're interested.

How to get EIS funding

So we've piqued your interest! Here's how to get the ball rolling:

1. Check your eligibility: Make sure you meet the EIS requirements.

2. Generate investor interest: HMRC expects you to have potential investors in mind before applying for advance assurance.

3. Apply for advance assurance: This pre-approval gives investors confidence that your business qualifies for EIS.

4. Prepare your documents: Create a comprehensive business plan, financial projections, and a clear explanation of how you’ll use the funds.

5. Issue EIS-compliant shares: Once you secure investment, issue the shares and submit the necessary forms to HMRC. (All super simple to do on Vestd).

EIS advance assurance

Advance assurance is pre-approval from HMRC that any money investors put in is likely to benefit from EIS tax relief, and that your company fits the criteria.

Advance assurance is not essential to have, but most investors will ask for it - because while it makes absolutely no guarantees - that initial nod from HMRC is reassurance enough.

Vestd customers can apply for advance assurance, complete and submit all the necessary forms to HMRC and issue EIS shares to investors in just a few clicks!

Fixed-fee fundraising with Vestd

The Enterprise Investment Scheme might just be the key to unlocking your company's full potential. Get the funds you need to grow and give investors generous tax breaks in return. As venture capital schemes go, EIS is hard to beat!

Did you know that as well as applying for advance assurance, you can manage your entire funding round on Vestd? What's more, we won't take a cut of your round! Discover our InVestd Raise add-on today.

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Information correct at the time of publishing. Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'