There are a number of conditions that must be satisfied by the investor and the company in order for the investor to qualify for tax relief under the EIS, including the following:
The purchase of shares by the investor and the purpose for which the money is being raised by the company by way of the investment must be for genuine commercial reasons and not part of a scheme to avoid tax.
- Duration of Shareholding
The investor can only claim income tax relief on a maximum of £1 million of investment per tax year.The company can obtain up to £5 million by way of investment under the EIS (and such limit includes money raised via any other investment schemes, such as the Seed Enterprise Investment Scheme (SEIS)).
If the company has previously raised finance by way of the SEIS, it must have spent 70% of those funds before obtaining investment under the EIS.
Non-Material Interest in the Company
The investor must not have a material interest of 30% or more in the ordinary share capital of the company.
In addition, the investor cannot be a director or employee of the company prior to the issue of the EIS shares but can become a director afterwards.
The company should conduct business on a commercial basis with a view to making profits and this should not include a substantial level of excluded activities, such as property development or farming.
The money raised via the EIS investment must on the whole be used in the qualifying trade.
The investment must be in an independent company, which means that it cannot be controlled by another company, whether on its own or together with any person connected with that company. The company must remain independent throughout the period of three years following the date of the issue of the EIS shares.
In addition, any subsidiaries owned by the company must also be independent and not controlled by any person other than the company.
The company must have gross assets not exceeding £15 million immediately before the EIS shares are issued and £16 million immediately afterwards.
The company must have fewer than 250 full-time employees at the time of issue of the EIS shares.
HMRC - EIS 1
An application for formal approval by HMRC needs to be submitted within two years of the expiry of the tax year in which the EIS shares were issued (this varies slightly in the case of a company that has not traded prior to the issue of the EIS shares).
Companies may submit details of the proposed EIS investment to the HMRC Small Company Enterprise Centre (SCEC) for advance assurance on whether the investor will be able to claim the relevant tax reliefs on the share purchase.
If you would like further information or require assistance in respect of entering into an EIS investment then please do not hesitate to enquire here.