Investments made under the Enterprise Investment Scheme (EIS) give the company 100% but can cost investors just 70%.
EIS, the senior version of the Seed Enterprise Investment Scheme, opens up significant opportunities for businesses to raise growth funds at this time.
The scheme increases upside return and lowers downside risk for investors who subscribe for shares in early-stage companies. The range of tax benefits under EIS include income tax relief of 30% alongside capital gains tax and other incentives. As a simple example:
Richard makes a crowdfunding investment of £10,000 under EIS in 2012/12. Potentially his tax relief is 30% of his investment and therefore worth £3,000. If Richard’s overall tax liability for the year is £25,000 this is reduced to £22,000. The maximum Richard could have invested in the tax year is £500,000.
Richard’s investment gives the company £10,000, yet cost him just £7,000.
For companies to raise funds under EIS, there are important qualification and compliance aspects, some of which include:
- The maximum that a company can raise is £2M in any 12 month period (due to be raised to £10M for 2012/13), though this total includes funds raised through the Corporate Venturing Scheme and Venture Capital Trusts
- The company must be unquoted, not controlled by another company, have Gross Assets of less than £7M and fewer than 50 employees
- The company must carry on a qualifying trade and the money raised by the share issue can be used either for the purpose of an existing qualifying trade or for the purpose of preparing (including R&D) to carry on such a trade
- Shares issued must be fully paid up Ordinary Shares with no special rights
Companies are able to apply to HMRC for Advanced Assurance, which allows us to flag up on your crowdfunding pitch that your company is ready to offer EIS benefits to investors. Obtaining Advanced Assurance can be a straightforward process that normally takes 15 working days on submission of your business plan to HMRC.
As part of your crowdfunding your accountant may become involved in the preparation of your financials, you should also seek their formal advice on EIS, company and investor qualification and compliance for the years following your fund raising.
Further information can also be seen here at the the HMRC website and by calling their helpline.