UK Enterprise Investment Scheme (EIS) – budget changes

In my blog post earlier this year I explained the importance of the UK Government’s EIS scheme to UK angel investments.  In the recent budget some changes to the scheme were made which further increases its attractiveness to angel investors.  The most important of these is that tax relief has grown from 20% to 30% of the sum invested – this is hugely significant and means if you’re trying to raise money from UK angels you really must ensure that you can qualify for EIS relief.

There are some more detailed changes and these have been identified by Baker Tilly accountants (an excellent firm in my experience by the way) in their summary of the budget changes, which I repeat below:

“Investors under the EIS are entitled to upfront income tax relief of up to 20% of the amount invested.  From 6 April 2011 the available relief will increase to 30% of the amount invested.

Currently an individual can invest up to £500,000 under the scheme – from 6 April 2012 this limit doubles to £1 million.

To qualify for investment under the EIS or from VCTs a company must have fewer than 50 employees and its gross assets must not exceed £7 million immediately before, or £8 million immediately after the investment.  These restrictions are to be changed (for investments made on or after 6 April 2012) to a requirement to have fewer than 250 employees and gross assets of no more than £15 million immediately before the investment.

Companies are currently only able to raise up to £2 million in any 12 month period under the EIS or from VCTs.  From 6 April 2012 this annual limit increases by 400% to £10 million.

All the above changes are subject to EU State Aid approval.”

 

EIS – Importance to UK Angel Investments

The Enterprise Investment Scheme (EIS) is one of those rare Government incentives that actually works.  It is very important that any UK based start-up trying to raise funds from Angel Investors understands EIS as it is a key requirement for many Angels, myself included.

What is EIS?  Details are on the HMRC website, but in summary it provides tax relief for an investor investing in an EIS qualified company, subject to a certain number of rules.  In practice what this means is that for each £100 I invest in an EIS qualified company I get £20 back off my income tax bill, a significant return.  Furthermore, provided I hold the shares for 3 years, then, should the company be successful and I later sell my shares, any gain I make will be free of Capital Gains Tax (CGT) – today that saves me 40% on exit!  Finally, in summary terms, should the investment not be successful and the company fails I can write the loss off against income tax (not just against Capital Gains).

If you’re running a start-up business I hope you can see why understanding EIS is so essential when asking an Angel to invest – the EIS scheme is a real incentive for investment.  There are rules associated with EIS and it is important that you understand them; for example in the standard Shareholder’s Agreement I use for investments it is a condition that the company does nothing to prejudice its EIS status.

Is everything about EIS good?  Inevitably not; there are plenty of changes that would make it even better in terms of encouraging greater investment in UK businesses.  Before the last election in May I wrote a guest blog for startups.co.uk with my 3 Angel wishes for a new Government, included in which was a request for greater EIS incentives.  This subject was also discussed at length at the recent Seedsummit event sponsored by Seedcamp on 26th January at Techhub.  Some of the changes suggested include:

1. Allowing convertible loans (which include conversion discounts and interest) to be allowed for EIS
2. Similarly enabling preference shares to be allowable
3. (and my main gripe) allow a greater percentage holding to qualify for EIS (currently limited to 30%)

It’ll be interesting to see whether there is any movement on this or other aspects of EIS in the forthcoming budget on March 23rd.