Key improvements to EIS in the 2012 Finance Act

The Enterprise Investment Scheme’s availability and benefit to investors and companies will be improved by:

• investor’s maximum annual investment is increased to £1million
• no minimum subscription threshold for investors.
• company maximum gross assets limit is increased to £15million before and £16million after the issue of shares
• company maximum tax incentivised venture capital fundraising limit is increased to £5million
• the permitted number of employees is increased.

The above changes came in in two stages, the investor limits from 6 April 2012 and the company limits from 19 June 2012.

Investors who claim EIS relief can obtain income tax relief of 30% of the sum invested and capital gains tax deferral relief against gains matched with their investment.

Investor maximum investment

The maximum that an individual can invest and claim EIS relief on has been doubled to £1million. This offers income tax relief of £300,000 which is available as a reduction in tax payable, not a relief matched against income.

There is no restriction on the number of companies an investor can invest in, enabling investors who do not have a specific target company in mind to select a wide range of investee companies.

No minimum investment

The minimum investment threshold of £500 has gone. The old threshold was a nuisance and largely unnecessary since the costs of making an investment, taking professional advice etc., mean that there is little likelihood of investors making very small EIS subscriptions.

Company asset limits

The limits on an investee company’s gross assets have more than doubled. This restores previous limits whose reduction had been criticised and will enable more companies to benefit from EIS. The test is still one of gross assets which excludes companies that may have already made large investments, funded by borrowing, which is in keeping with the policy objective of encouraging smaller enterprises to attract investment and grow.

Maximum investment through EIS more than doubled

Until 19 June 2012 the maximum that a company could raise through EIS in one year was £2million: this is now increased to £5million. The limit is not restricted to EIS alone: the company must also take account of Seed EIS, venture capital trust (VCT) investments and other state aid when considering this limit.

Employee numbers

Until 19 June 2012 a company with 50 or more employees could not issue EIS shares. That number has now been increased to 250 ‘full time equivalents’. The company may count part-time employees (generally those working less than 35 hours a week) proportionally, so two employees, each working a 17.5 hour week count as one full time equivalent.

EIS may follow seed EIS

For the smallest companies, those less than two years old, with fewer than 25 employees and gross assets of less than £200,000 Seed EIS is available as a first option to help them get off the ground but once any EIS investment has been raised Seed EIS ceases to be available. Start-ups looking to maximise funding opportunities can combine the different tax-favoured investment schemes but need to tread carefully because the rules are complex and full of restrictions aimed at countering perceived abuse.

For more information please contact Chris Williams