What qualifies for EIS ?

The Government designed EIS to support high-growth, UK-based companies that will shape the future.

To ensure businesses receiving funding align with these objectives, they must adhere to specific criteria which we will explore in this section. If a company does not qualify or loses qualifying status, tax reliefs claimed by investors may be withdrawn later. To avoid this, fund managers may seek Advanced Assurance at the outset and regularly review the status of each company within the portfolio. This is not mandatory, but it does help provide confidence that the company is qualifying.

The key criteria are the following:

Companies qualifying for EIS funding are typically privately owned (although they can also be listed on the Alternative Investment Market) and must not be in any financial difficulty.

Companies must be actively trading and operating in a qualifying trade (excluded businesses include asset-backed, low-risk activities such as dealing in land, farming, residential care homes, and energy generation). There must be a ‘risk to capital’ as the true spirit of EIS is to support innovative, high-growth businesses; investments cannot be structured to provide a low-risk, and therefore typically low-return, investment.

The capital raised must be used to deliver growth, such as increasing revenue, customer base, and number of employees. They should not be used to maintain the business (e.g. covering pre-existing day-to-day spending).

See here for more information on the Risk to Capital condition.

  • The money invested must be used to buy new shares, not existing ones.
  • They must be relatively small at the investment point (under 250 employees), as the Government aims to use this funding to support high growth.
  • You can receive investment under the Enterprise Investment Scheme if it’s within seven years of each company’s first commercial sale (maximum ten years for a Knowledge-Intensive company).
  • Any funds must be used within 24 months, which is incredibly helpful for start-ups because it motivates them to raise a reasonable amount and dedicate the funds to an immediate business purpose.
  • Over a year, funding mustn’t exceed £10 million (£20 million for knowledge-intensive companies).
  • Its lifetime value must not exceed £24 million (£40 million for knowledge-intensive companies).

To qualify for EIS funding, a company must be UK-based and carry out a qualifying trade within the UK. This requirement ensures that the scheme supports the growth and development of a UK business and contributes to the UK economy (via taxes and employment).

Businesses excluded from EIS funding:

The government designed EIS to focus funding where needed most, and business sectors that qualify for EIS funding can change over time. Before the Patient Capital Review in 2017, the EIS market was abundant, with funds invested in safe, asset-backed companies, with the emphasis being on tax reliefs only. This was never in line with the true spirit of EIS, and these welcome changes allowed EIS Fund Managers to use funding to back companies with ambitious growth plans. As a result of these changes, HMRC confirmed that the following activities are currently excluded from EIS funding:

  • Dealing with land, property development, and leasing.
  • Dealing with goods other than regular retail or wholesale distribution.
  • Dealing with financial instruments, banking, insurance, hire purchases, money lending, and other financial activities.
  • Receipt of royalties or licence fees.
  • Legal and accounting services.
Considering this, common industries that are discounted include:
Farming and Market Gardening
Forestry
Operating or managing hotels or residential care homes
Coal production, steel production and shipbuilding
All energy generation activities

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