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How to Qualify as an Enterprise Investment Scheme

Friday, 16 November 2012

Enterprise Investment Schemes can be a great way for small businesses to raise finance if mainstream channels fail to deliver. However, the tax incentives that make them attractive for investors will only apply if the relevant criteria are met. 

If you think your company qualifies for an EIS then it is advisable follow the advanced assurance procedure set out by the Small Company Enterprise Centre which administers EIS. This will give your company the best chance of starting on the right foot with EIS investors and reduce the risk of them losing their tax advantages. 

The Small Company Enterprise Centre (SCEC) is part of HMRC. Companies may apply to SCEC using Form EIS(AA) to check whether they meet all the requirements for EIS. The application requires that certain information about the company is provided with the form. We recommend companies unfamiliar with this process take advice to ensure that the correct information is provided and the process is expedited as efficiently as possible. 

Once the shares have been issued, the company must complete Form EIS1 and send it to the SCEC. If all the criteria have been met then it will issue forms EIS2 to confirm the company’s compliance and EIS3 to enable investors to claim their tax reliefs.

Excluded Trades
There are various criteria that must be met for any company to qualify within the EIS rules. In addition there are certain trades that are excluded even if all the other criteria have been met. Excluded activities are:
  • Dealing in land, commodities or financial instruments
  • Dealing in goods other than in the ordinary course of retail or wholesale
  • Carrying out financial services such as banking, insurance or financing
  • Leasing or letting assets on hire
  • Receiving royalties or licensing fees
  • Providing legal or accountancy services
  • Coal production
  • Steel production
  • Agricultural production
  • Timber production
  • Property development
  • Operating or managing hotels
  • Operating or managing nursing homes or residential care homes
  • Generating electricity unless by hydro power or anaerobic digestion. Some co-operative and community schemes are also excepted
  • Providing services to a company that carries on primarily excluded activities
The requirements do not prevent companies from carrying out, in part, some of the excluded trades but they must not constitute a substantial part of its business i.e. more than 20 per cent. 

If you have any questions about the Enterprise Investment Scheme as an investor or a business Rollingsons has experienced lawyers who can assist you. For more information please contact James Crighton via e-mail or by telephone on 0207 611 4848.