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RAISE FINANCE FOR YOUR BUSINESS THROUGH EIS
BUSINESS LOOKING TO RAISE FINANCE FROM EXISTING OR NEW SHAREHOLDER?
In order to make your business as tax-efficient and attractive to shareholders you will have to ensure you are taking advantage of every tax break you are entitled to.
For example the Enterprise Investment Scheme (EIS), which was developed to help small high-risk trading companies raise finance by offering tax reliefs to investors who subscribe for new shares.
WHAT IS EIS?
Enterprise Investment Scheme (EIS) is a scheme developed to help small high-risk trading companies raise finance by offering tax reliefs to investors who subscribe for new shares.
For companies to qualify for the scheme certain conditions need to be met for up to 3 years from the time of the investment as not doing so can end up in tax relief not being given to investors or if this has already occurred, withdrawal of the relief.
· Shares must be unquoted at the time when they are issued and there must be no prearrangement for the shares to eventually become quoted on a recognised stock exchange.
· Another company cannot control a company wishing to qualify and cannot control any subsidiaries it has. The value of gross assets should not exceed £15m before the share issue and £16m after. It must have at least 250 employees at the time of the share issue and 500 if it is a knowledge intensive company.
· It must have a permanent establishment in the UK. Within 2 years of the share issue all money raised must be used by the company or by a 90% qualifying subsidiary solely for the purpose of a qualifying activity. It can carry on some excluded activities (for example dealing in land, commodities, financial instruments and goods other than in an ordinary trade of retail or wholesale distribution) however this can only be a maximum of 20% the company’s total activities.
· Qualifying companies and their subsidiaries cannot take more than £5m of EIS or other risk investment in a year. No more than £12m can be taken in total; this amount is £20m for a knowledge intensive company.
REQUIREMENTS FOR INVESTORS
· An investor cannot have a connection with a company in order to claim relief. Having a financial interest in a company can make someone connected. If an investor holds more than 30% of the share capital or voting rights and is entitled to more than 30% of the assets in the occurrence of closing down the company then he/she will be deemed as having a connection by financial interest. This condition is for 2 years before and 3 years after the issuing of the shares, if not 3 years after the start of qualifying trade if this is later.
· Investors cannot be partners, directors or employees of the company as this is deemed an employment connection. This limitation has the same time window as a connection through financial interest. However, there is an exception for directors who are Business Angels who do not receive remunerations who may qualify for Income Tax relief. If they become a paid director during the 3-year window the tax relief will not be withdrawn as long as the remuneration is reasonable.
REQUIREMENTS FOR SHARES
· When the shares are issued they must be paid up in full in cash and they must not be full-risk ordinary shares nor be redeemable.
· An investor cannot acquire the shares in question using a loan offered on terms and conditions that would not have been in place for any other shares.
· There must not be arrangements in place for the investor that would protect him/her from the usual risks associated with investing in shares and there must be no strategic alliances where the company owners agree to similarly invest in each other to obtain the tax relief.