The first port of call is to obtain either Advance Assurance or formal clearance from HMRC that your business qualifies as an EIS company. This is done by application to the Small Company Enterprise Centre (SCEC) on Form EIS AA available here.
Small Company Enterprise Centre
HM Revenue & Customs
1st Floor Ferrers House
Castle Meadow Road
Nottingham NG2 1BB
Tel: 0115 974 1250
Fax: 0115 974 2954
Obtaining EIS Relief
The purpose of the Advance Assurance is mainly to give potential investors that the company will qualify for EIS relief but this is not a guaranteed process since the company must comply with the rules.
After 4 months trading (or immediately if the company has already been trading for 4 months), the company must submit a compliance statement on Form EIS 1 available here. A separate EIS 1 form must be submitted for each date on which shares are issued.
Provided that all the conditions have been satisfied, HMRC will issue an EIS 2 form to the company, confirming it is authorised to issue EIS certificates and will supply sufficient EIS 3 forms for each investor. These forms should be completed and sent to the investor, who must then submit the form to his/her own tax inspector. The relief is usually given in the form of an adjustment to PAYE code, offset against self-assessment payments due or sometimes in the form of a rebate, depending on the individual’s circumstances. There is a time limit for claiming EIS relief and investors will want to claim their tax relief as soon as possible so companies should be diligent at filing EIS 1 forms promptly.
Warning. EIS clearance whether in the form of Advance Assurance or formal, is granted on the basis of "information provided". You should provide HMRC will all relevant information in order to ensure the integrity of the clearance and must remember that the company needs to comply throughout the three year qualifying period.
For full details on applying for EIS Status please download the pdf here…..
Does my Company Qualify for EIS Relief?
HMRC publish guidance for investors and companies, which provides further information www.hmrc.gov.uk/eis/. Most companies qualify although there are certain exceptions – please see the excluded activities on HMRC’s website http://www.hmrc.gov.uk/manuals/vcmmanual/index.htm. However, whilst some excluded trades are clearly cut and dried such as property, some other activities do qualify although they would appear not to on first glance so it is worth consulting an experienced professional if you are in any doubt. A company can carry on some excluded activities, but these must not be 'substantial' part of the company’s trade. HMRC take 'substantial' to mean more than 20 per cent of the company’s activities.
There are additional rules, summarised below and further details of which are set out at www.hmrc.gov.uk/eis/. In addition, the company:
- Must be an unquoted company i.e. not listed on the LSE or any other recognised stock exchange. AIM and Plus Markets are not considered quoted.
- Must not be controlled by another company
- Subsidiaries must at least 90% owned
- Must not have gross assets of more than £7m before a share issue or £8m immediately after a share issue.
- Must have fewer than 50 full-time employees (or their equivalents) at the time the shares are issued
- Must have a ‘permanent establishment’ in the UK (after 6th April 2011)
The rules regarding not being controlled by another company, qualifying subsidiaries and the company carrying on the trade must be met throughout the three year EIS period. If they are not, then the investors will lose their reliefs.
Raising Capital
The EIS Association does not engage directly in raising capital for companies although many of its members are actively involved in doing so.
Business Plan - a well thought out and clearly written business plan is necessary to attract an investor, whichever route to finance is taken. This is a major activity and will use up valuable management time. However, it is worth doing well. If you need to employ a third party to do this, make sure that such party has the necessary experience and track record to produce a document that will hold the attention of a sceptical investor (who will have seen several such plans before yours). Always ask for references or case studies before hiring your professionals.
Generally companies seeking investment should consider various sources of capital, depending on the amount being sought. The suggestions below are not comprehensive but will act as guidance:
- Less than £50,000: try friends, relations or your local accountants (who may know of somebody wishing to invest in a small company).
- £50,000 to £250,000: contact local accountants, business angel networks and the British Business Angel Association
- £250,000 to £750,000: contact one of the accountancy or legal members of the EISA
- Over £750,000: contact one of the Sponsors or Promoters on the list of EISA members. Some sponsors may have a slightly higher minimum limit than this.
- £1m+ approach EISA Fund Manager members – make sure you do your homework and look up their criteria before approaching them.
Remember always to be as prepared and articulate as possible when approaching potential investors. The first impression is critical and it is rare to have an opportunity to try again if your plan is rejected.
Remember always to be as prepared and articulate as possible when approaching potential investors. The first impression is critical and it is rare to have an opportunity to try again if your plan is rejected.
Another source of useful information in respect of seeking capital investment is the British Venture Capital Association on 020 7420 1800 or www.bvca.co.uk.
Enterprise Management Incentive – “EMI”
A sister in legislative terms to the EIS, the EMI is an employee share option scheme that is tax advantageous to both company and employee. Option schemes are a key part of development in EIS-type companies as they enable companies to attract and retain key high calibre people to assist with their growth. A brief summary of the EMI is set out below and worth considering once you have obtained your investment and are on the way.
EMIs are tax advantaged share options. They are designed to help small, higher risk companies recruit and retain employees who have the skills to help them grow and succeed. They are also a way of rewarding employees for taking a risk by investing their time and skills to help small companies achieve their potential.
Tax advantaged share options with a market value of up to £120,000 (£100,000 prior to 6 April 2008) may be granted to a qualifying employee of a qualifying company, subject to a total share value of £3 million under EMI options to all employees.
The shares must be in an independent trading company that has gross assets of no more than £30 million.
The grant of the option is tax-free and there will normally be no tax or National Insurance contributions for the employee to pay when the option is exercised. There will normally be no National Insurance contributions charge for the employer. For further information, HMRC’s guidance note is at www.hmrc.gov.uk/shareschemes/emi-new-guidance.htm.
Alternatively, your accountant may help or specialists in share options schemes.