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EIS General Requirements

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

EIS General Requirements – Introduction & Background

In addition to the specific requirements set out for the shares, the Company and the investor, there are also General Requirements that must be satisfied…

The EIS General Requirements can be summarised as follows:

  • There must have been 4 months of activity before issue of shares
  • The shares must issued to raise money for purpose of qualifying business activity
  • The funds must be employed for that purpose within a certain time limit
  • The relevant investments in Company must not exceed investment limits
  • No pre-arranged exit for the investor
  • No disqualifying arrangements
  • Investment timings
  • No tax avoidance

Funds raised must be employed for qualifying business activity

The funds raised under EIS must be:

  • Raised for the purpose of a qualifying business activity; and
  • Those funds must actually be employed for that purpose (and within a certain time limits

The funds must be employed or used for the relevant business activity within a limited period of time.

That period of time is later of:

  • 2 years of share issue; or
  • 2 years from starting the qualifying trade (eg if was preparing to trade when the shares were issued)

It should be noted that there are cases where the Court has considered the failure to use funds within the required time limit including Christopher Richard Skye Inns Ltd [2011] and Benson Partnership Ltd [2011].

Limits on a Company’s Relevant Investments

Annual limit on relevant investmentLifetime limitWhat is a relevant investment?
•       £10m for Knowledge Intensive Companies

•       Max £5m

•       in a 12 month rolling period (Ie not a calendar year, tax year, or accounting period)

•       £20m for Knowledge Intensive Companies

•       Otherwise, £12m

•       VCT investment

•       EIS / seed EIS investment

•       Social Investment Tax Relief

•       Any state aid approved investment

•       Don’t forget investments made in subs

Investment Timings

This is a relatively recent change (Budget 2017) and it effectively imposes a long stop date at which the Company can raise its first venture capital finances. This includes EIS and Seed EIS.

The time limits are as follows:

Type of Company Time limit 

Time measured from

 

General7 yearsFirst commercial sale
Knowledge Intensive Companies10 yearsWhen annual turnover first exceeds £200k

It should be noted that some exceptions exist.

No Pre-arranged Exit

Clearly, it might make for an attractive investment if the Directors of the investee company are able to set out that a white knight will ride in after three years and purchase the shares from the investor.

However, any such formal arrangements are prohibited.

Further, there must be no ‘Underpinning of value’. For example, schemes could not insure investors from making a loss, or build in mechanisms to maintain the value of the shares artificially.

No Disqualifying Arrangements

Other provisions preventing any other monkey business include the requirement that there are ‘no disqualifying arrangements’. This is widely drawn and includes any arrangements entered into:

  • with the purpose of ensuring that the relevant tax relief is available; and
  • Either:
    • all or most of the monies raised are to be paid for the benefit of a party to that arrangement, or
    • it would be reasonable to expect that, absent the arrangement, the business would be carried on as part of another business.
    • In the latter case, this means that a structure to separate part of an existing business (that would not qualify) so that investment into that part, taken alone, can qualify for relief is no longer effective.

This is widely drawn.

If you have any queries about EIS General Requirements or EIS in general, whether as a potential investee company or investor, then please do get in touch.

 

Albeit, we can’t give you investment advice as we are not regulated by the Financial Conduct Authority – so please get that type of advice from someone who is!

 

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