EIS guide

25 24 RULES FOR INVESTORS AND QUALIFYING COMPANIES RULES FOR INVESTORS AND QUALIFYING COMPANIES No linked loans No relief is available (between the period commencing two years before the issue of EIS shares and the later of three years after the investment was made and the issue of EIS shares and the date the company commences trading) if the investor or any associate receives a loan from any person that would not have been made, or would not have been made on the same terms, were it not for the EIS investment. Genuine Commercial Purpose There must be no arrangements or structuring of a company’s activities where those activities have no commercial purpose other than to generate tax relief. Pre-arranged exits No relief is available if there are certain arrangements in connection to the share issue, including: • Arrangements that might, in any way, lead to the disposal of the shares, or of other shares in the company; • Arrangements that might lead to the cessation of the company’s trade, or of any trade carried on by a person connected with the company; • Arrangements for the disposal of some or all of the assets of the company or of any person connected with the company. This rule is intended to ensure that the company is capable of carrying on its trade indefinitely under its existing ownership. But, it does not stop the directors of a company from indicating in advance to potential investors how they envisage that shares in the company might be disposed of at some later date. Receiving value Investors (and their associates) must not ‘receive value’ from the investee company: if they do so the tax relief is withdrawn in proportion to the value received and any deferred capital gains crystallise. Receiving value includes any kind of payment, service, goods, benefit or loan that transfers value from the investee company to the investor; this includes any transfer of this kind in exchange for the shares or any rights attached to the shares. It can also include repayment of loans to the investor or their associate. The investor can interact with the company as an ordinary customer, but this must be on the same terms as other conventional customers. Types of shares Investors must subscribe for and purchase full risk, new ordinary shares with no arrangements in place to protect the investor from the normal risks associated with investing in shares. They cannot be redeemable, nor have any preferential rights to a company’s assets in the event of a winding up. In certain circumstances, the shares may have limited preferential rights to dividends, but the rights to dividends cannot be cumulative (where unpaid dividends accumulate and are paid to the shareholder at a later date when funds are available) and the preferential rights to dividends cannot be subject to discretion as to the amount or timing of payment. During an investor’s relevant three-year period, none of the company’s shares can be quoted on a recognised stock exchange and there can be no arrangements in place to list on an exchange at the time the shares are issued. However, the Alternative Investment Market (AIM) is not considered to be a recognised stock exchange in the rules governing EIS. Nevertheless, the vast majority of EIS offers are not focused on companies that are listed on an exchange. The shares must NOT be issued under any reciprocal arrangement (“I’ll invest in your company if you invest in mine and we can both benefit from the tax relief”) and the shares must be subscribed for, for genuine commercial reasons and not for the purpose of participating in a tax avoidance scheme of any description. Finally, the shares can either be purchased directly by the investor, or via a nominee or EIS fund. See pages 38 and 39 for more detail on EIS funds. Underpinning value There can be no arrangements that are intended to protect the value of the investment in any way. This includes, for example, schemes that insure investors against making a loss, and schemes to maintain the value of the shares artificially. There is an exception for ordinary commercial matters, such as insurance by the company against normal trading risks. Follow on investments Following a review by the EU in 2015, it was perceived that the ability for existing, non- SEIS and EIS shareholders to subsequently claim EIS relief on a follow-on investment is not in line with the intention of the scheme to attract new full risk capital investment to the company. As a result, since 18 November 2015, relief has been denied to ’follow-on’ shareholders unless the only other shares they hold at the time of the proposed EIS investment are: • Shares that previously attracted relief under EIS, SEIS or social investment tax relief; or • Subscriber shares that have either been held since issue or acquired from an ‘off-the- shelf’ formation agent before the company issued any non-subscriber shares. Care should be taken to establish what holdings clients have in a company raising further share capital under EIS. This is particularly relevant for companies issuing new placings on AIM - shares may be held as part of a BR portfolio and may have been acquired in the open market and not from a prior EIS raise. The test is at the time of the prospective EIS share issue and therefore the existing shares can be sold or given away (and will be taxed accordingly) or transferred to a spouse or civil partner.