EIS guide

5 THE EIS LANDSCAPE The EIS landscape Purpose The Enterprise Investment Scheme (EIS) is a government scheme designed to encourage investment into small and medium-sized enterprises (SMEs) that have a permanent establishment in the UK. Along with the other Venture Capital Tax Reliefs (which include the Seed Enterprise Investment Scheme (SEIS) and Social Investment Tax Relief (SITR)), the scheme offers tax relief to individuals as an incentive to invest in SMEs and social enterprises that are not listed on any recognised stock exchange. Many SMEs and unlisted companies are likely to struggle to obtain alternative sources of finance. However, these potentially high growth companies, while deemed risky, are recognised to be a vital contributor to economic growth and job creation. Therefore, the government offers generous incentives to investors in these schemes to reward them for assisting such companies to grow and develop. Autumn Budget 2017 In addition, and in line with similar rules introduced for VCT and SEIS, it was announced in the Autumn Budget 2017 that the 2017/18 Finance Bill would include a new ‘principles-based approach’ to identify lower risk activities that should not benefit from the tax reliefs. In accordance with the Finance Act 2018, the ‘risk-to- capital condition’ applies to investments made on or after 15 March 2018. The Autumn Budget 2017 also included a welcome boost for EIS investments into knowledge- intensive companies. Knowledge-intensive companies (explained in greater detail in later sections) are those which are carrying out significant levels of research and development (R&D); these can qualify for higher amounts of EIS (and VCT) funding than other companies. See page 31 for HMRC’s definition of R&D. As a result, for EIS investments made from 6 April 2018: • The 12-month investment limits were doubled (from £5 million to £10 million per company) • Greater flexibility was provided to knowledge-intensive companies over how the age limit is applied (explained on page 31). • The 12-month investment limit for individuals doubled from £1 million to £2 million, provided any amount above £1 million is invested into knowledge- intensive companies. There is more detail on these changes in later sections. The rate of income tax relief was increased from 20% to 30% from April 2011 and the scheme was expanded in 2012 to allow greater levels of investment into larger companies. This coincided with a boom in investment into renewable energy projects that often also qualified for other government subsidies and new investment managers entered the market to meet the increased demand. However, in 2014 the Chancellor excluded subsidised electricity generation from the EIS reliefs (with ALL energy generation activities excluded from April 2016), recognising that these investments were not sufficiently risky (especially those subsidised through other means) to justify the EIS tax advantages. Further changes were made in 2015 in order to ensure that the EIS reliefs continued to comply with EU State-aid requirements. These changes had the effect of tightening up the rules in some areas by adding further restrictions on the types of companies that qualify for EIS. SIZE OF EIS-QUALIFYING COMPANIES up to 50 full-time equivalent employees up to 250 full-time equivalent employees PRIOR TO 6 APRIL 2012 ON OR AFTER 6 APRIL 2012 None of these recent changes should be interpreted as the government changing their support of EIS. The changes were designed and targeted to ensure that EIS continues to be both compliant with EU State-aid rules and meets the purpose for which it was introduced, namely to address the UK equity gap, i.e. equity funding for small businesses. 2019 marks the 25th anniversary of EIS, making it one of, if not the, longest running tax incentive investment schemes in the world. ENTERPRISE INVESTMENT SCHEME ASSOCIATION History and main developments EIS was launched in 1994 as a replacement for the Business Expansion Scheme. Since then, over £20 billion has been invested into almost 30,000 companies via EIS. This is widely seen as a great success and the scheme has enjoyed the support of successive governments. Over its lifetime, a number of changes introduced to the rules governing EIS have been made with the intention of expanding the scheme - as well as ensuring that EIS continues to meet EU State-aid requirements and remains focused on growing and innovative businesses. 1994 2019 29,770 companies £20bn invested into