An entrepreneur would normally apply for finance under the Enterprise Investment Scheme (EIS) by ‘pitching’ to would-be investors – entrepreneurs, wealthy individuals or friends and family.
A pitch for finance for your business should:
The investor needs to be convinced as to the viability of the business; that there is an understanding of the business risks; and that the business is able to provide them with an adequate return on their investment.
For a company to qualify for EIS it must have no more than 250 employees, and its total assets cannot exceed £15,000,000 before the issue of EIS shares, and £16,000,000 afterwards.
Applying for scheme clearance from HMRC
The Enterprise Investment Scheme (EIS) is administered in HMRC by the Small Company Enterprise Centre (SCEC), which decides if a company and a share issue qualifies. If they do, the SCEC then takes responsibility for checking the accounts of the company to ensure that it continues to meet the requirements of the scheme.
A company may apply for advance assurance of qualification under the scheme, using form EIS(AA). Companies are not required to obtain such an assurance, but may consider it prudent to do so, particularly if using the EIS for the first time. Obtaining assurance provides an opportunity to spot any problems before shares are issued. Assurance from the SCEC is also useful for companies to show to potential investors. However, bear in mind that this is an informal clearance procedure which will not be binding on HMRC.
When the investment is made and the shares are issued, the company must complete a Form EIS1 compliance statement.
The investor will keep a close eye on all aspects of the business’s performance to ensure that its objectives are being met and that the return on investment is maximised. It is important to retain a good relationship with the investor, which will influence their willingness to provide further finance at a later date, if required.
One of the biggest problems with the EIS scheme is that there are many rules to comply with, and if one or more of them are broken, legislation provides for a complete withdrawal of tax reliefs. This could result in the investor being faced with an unexpected tax liability.
The legislation also provides for the amount of relief obtained, or otherwise available, to be reduced during the relevant qualification period where: