The EIS scheme is a very significant inducement for investors in start-up and early stage companies in the UK's creative industries. So, I thought I'd take the opportunity to depart from my usual posts on digital media law and, thanks to my friend Bob Wexler, an expert lawyer in this field, provide all my cash rich investors (!) with a handy summary of the rules governing EIS investments.
Bob's in transition from Leeds to London but can be contacted on : 07896 713 982. So here are the rules:
The EIS is generally intended to encourage investment in the ordinary shares of unquoted trading companies but there is an exception for UK listed AIM and PLUS companies. The UK government is encouraging UK taxpayers to invest in EIS companies in order to help stimulate the UK economy. It has recently substantially improved the UK EIS tax benefits for this tax year and next year (which should continue in subsequent years) in an effort to ameliorate the recent tax increase for income from 40 to 50%( for income in excess of £150,000 ) , and capital gains rate increases from 18 to 28%.
The EIS rules are technical and need to be complied with. When a "qualified" individual subscribes for eligible shares in a qualifying company, the amount subscribed is a tax reduction, i.e., tax credit, saving income tax at 30% (was 20% last year). The shares must be newly issued, fully paid up ordinary shares which carry no preferential rights to dividends, assets, or redemption in the three years from the date of issue. The maximum total investment per investee that can qualify for income tax relief in the current tax year is £500,000, or £150,000 of tax credits. The total amount that a company can receive in EIS funds this year is £2,000,000. Tax relief is given in the year the investment is made, or can be carried back to the prior year. Relief must be claimed within 12 months of HMRC authorising the company to issue a certificate to the investor that the share issue qualifies for relief.
If an individual disposes of shares within three years of their issue, the tax reduction obtained may be wholly or partly withdrawn. Alternatively, if shares are disposed of after three years from issue, the tax reduction is not withdrawn. If there is a capital gain, it is exempt, and any loss for capital gains purposes is restricted by reducing the issue price, i.e., the cost, by the tax relief not withdrawn (but not so as to create a gain).
A qualifying individual investor is a UK resident taxpayer not connected with the company at any time from two years before the issue to three years after the issue. An individual is connected with the company if:
1 he holds (with other associates) more than 30% of the ordinary shares;
2 on a winding up of the company he is entitled to more than 30% of the assets;
3 he is an employee or a non-qualifying director of the company or of a subsidiary; or
4 a partner of the company or of a subsidiary.
A qualifying director who is also an employee is not treated as connected. A qualifying director generally is one who only receives reasonable remuneration from the company.
A qualifying company is one that:
1 carries on one or more qualifying trades;
2 it does not control any other company except for qualifying 90% subsidiaries and it is not under the control of another company;
3 the assets of the company must not exceed £7 million immediately before and £8 million immediately after the issue;
4 the company must have fewer than 50 full-time employees; and
5 the company must have raised less than £2 million from EIS type funds in the previous 12 months.
A qualifying trade is one carried on commercially with a view to a profit, and excludes, generally, financial activities, legal and accountancy services, property development, hotel management or operation, operating or managing residential care homes or nursing homes, farming, dealing in stocks and securities, and dealing in goods other than in an ordinary trade of wholesale or retail distribution. Solar energy deals with feed in tariffs only qualify for the current tax year. Poland does not have feed in tariffs (it has green certificates) so solar energy deals can be done this year and in future years. Poland also has grant money and low interest loans which can be used in solar deals.
A recent significant change to the EIS is the European Union requirement that a qualifying EIS company need only have a "permanent establishment" in the UK, rather than requiring it to have wholly or a substantial part of its business carried on in the UK. The term "permanent establishment" generally includes a place of management, a branch, an office, a factory, a workshop, and a place of extraction of natural resources. Consequently, there is now an opportunity to use the UK EIS for non UK operating companies, e.g., companies only with UK permanent establishments that are primarily doing business in non UK countries, such as the United States. UK individual investors would get EIS tax benefits by investing in such companies which can also be publicly traded AIM or PLUS companies.
The EIS is considered by the UK government to be a legal tax avoidance scheme. EIS investors/companies can get HMRC preapproval that the EIS regime applies.
The EIS rules will be further liberalised starting on 1 April, 2012, as follows:
1) 250 employees, up from 50;
2) no more than £15,000,000 gross assets before investment (was £7,000,000), £16,000,000 after the investment;
3) £10,000,000 maximum EIS investment (was £2,000,000); and
4) £1,000,000 individual annual limit (was £500,000).
As you can see, EIS is complex and shouldn't be tried at home - get expert advice!
Have a great week