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UK EIS & why it STILL matters for UK Climate Tech Start-ups and Scale-ups

[Updated from original post April 2022.] HMRC’s EIS (and SEIS) scheme is a great way for UK based early-stage businesses to attract potential investors and accelerate their growth. For any UK technology business, NOT to have it excludes you from an entire class of early stage invesestors: mainly UK angels, Angel Syndicates and EIS funds.

The downside is that, unfortunately, it involves quite a bit of paperwork, served with a generous side-helping of EIS terminology! But fear not, Greenbackers is here to help! This article is designed to give you an overview of what you need to know about the scheme, without getting lost in (quite!) all the jargon! Have a look.

What Is EIS?

EIS stands for ‘Enterprise Investment Scheme’ and is a tax relief plan established in 1992 by the UK government to encourage investments in early-stage businesses. 

Essentially, EIS incentivises investors – and Funds and Venture Capital Trusts set up on the scheme – to support EIS eligible businesses, by offering them potentially significant income tax relief (up to 30%) and capital gains reliefs (up to 50%) when they do so.

That’s why, qualifying as an EIS business may very well increase your appeal to potential investors. It’s a great scheme, well known and it matters, at least here in the UK.

In fact, funding from EIS increased to £1.905Bn in 2020/2019 up from £1.867Bn in 2019/2018 with an additional 155 companies receiving funding from the scheme (4,215 in 2020/2019 from 4,060 in 2019/2018). For SEIS, the numbers remained largely flat at £170M in 2020/2019 compared to £171M in 2019/2018. But that is still a big number. 2019 £2Bn pounds were invested in UK startups through EIS – which is unsurprising, considering that 80% of all UK angel investments are EIS/SEIS*. 

* SEIS (Seed Enterprise Investment Scheme) is a scheme similar to EIS, designed for slightly smaller companies. More on SEIS at the end of this guide!

Do you Qualify for EIS?

First thing’s first: in order to apply for an EIS scheme, you must meet a certain set of criteria laid out by HMRC. Specifically, you must: 

  1. Have a permanent place of business in the UK (office, factory, branch etc.).
  2. Not be listed or intend to be listed on a recognised stock exchange at the time you’re issuing shares. 
  3. Employee less than 250 full-time staff members, or 500 if you qualify as a Knowledge Intensive Company (see further down).
  4. Have gross assets worth under £15mill. before any shares issuances, and maximum £16mill. immediately afterwards.
  5. Be involved in a qualifying trade (see further down). 
  6. Not control any other companies, with the exception of qualifying subsidiaries.
  7. Be independent (i.e. not controlled by another company, or have more than 50% of your shares owned by another business). 
  8. Have made your first commercial sale less than 7 years ago (10 years for Knowledge Intensive Companies).
  9. Not expect to close after the completion of a project or series of projects.
  10. Intend to use your EIS funds to continue trade, start a new type of trade, or proceed with relevant research and development. You must not use EIS funds to acquire another business or trade.
  11. Plan to utilise the received funds within two years from the time you issue the shares. 

* Please note that this is not an exhaustive list of requirements. You’re advised to consult the full HMRC EIS guidelines before applying.

How Much Can you Raise Under EIS?

EIS allows you to raise up to £5 million per year, and a total of £12 million over your company’s lifetime. Note that this includes funds you may have raised through other venture capital schemes (including SEIS, social investment tax relief (SITR), and/or state aid offered under the risk finance guidelines); it also includes potential funds raised by any of your business’s current and/or former subsidiaries, as well as businesses you may have acquired.

How Long Can it Take?

At Greenbackers we took some of our own preaching as medicine recently for our own equity raise. We wanted to see if we could qualify. So on 21 November 2022 we retained Philip Hare & Associates to help us. We are big believers in getting specialists help with a track record. With their guidance and marshalling all of the required information quickly we received our EIS on 1 February 2023, so 15 weeks from start of process in our case but it could take longer, much longer if you DIY an application. Btw, we were very happy with the work Philip Hare and team did for us, their prices are reasonable in our opinion and we are pleased to recommend them.

What Are the EIS Rules For Investors?

Just as HMRC has outlined a specific set of criteria about which businesses qualify for EIS, there are also several rules determining who can invest through the scheme. Here’s what’s important to know: 

  1. EIS investors MUST be UK taxpayers. 
  2. Each investor may invest a maximum of £1 million in EIS qualifying companies per tax year. If Investing with a spouse, £2 million,
  3. Investors cannot sell or gift their shares for at least three years after their purchase. Otherwise, their tax relief benefits reverted. 
  4. The shares bought by any investor must be new (i.e. not already on the market). 
  5. Investors are not allowed to carry-forward their EIS tax relief. 
  6. Investors cannot be employees, partners, or a paid Director in the EIS company they’re investing (unless they are appointed in a Director’s position after already having received their EIS shares). 
  7. No individual investor can be issued more than 30% of your business’s total share capital. 

For the company: You must remember that your investors will only be entitled to their EIS tax benefits provided that you follow the scheme’s rules for a minimum of 3 years after receiving their investment. Should you not do so, your investors’ tax benefits may be withheld or withdrawn. That’s why, if you become ineligible for EIS during the initial 3 year period, you must make sure to inform HMRC within 60 of the change that rendered you ineligible. 

How Does the EIS Process Work? 

As a general note, you should know that EIS is administered by HMRC’s Small Company Enterprise Centre (SCEC). SCEC are the ones to check your paperwork and ultimately decide whether you qualify for EIS or not.

What is An ‘Advance Assurance’?

In terms of the process, most companies start by filing an Advance Assurance application to HMRC. This is an application which, provided it receives approval, grants the business a provisional indication from HMRC that you qualify for EIS, and therefore so will potential investments coming into your company. ‘Provisional’ is the key term here, as an approved advance assurance does not 100% guarantee that you qualify for EIS; it’s simply an indication that you are extremely likely to qualify, but nevertheless full EIS eligibility can only be confirmed after potential investments have been made.

Filing an Advance Assurance is not a compulsory requirement in order to qualify for the scheme. However, most small companies find that it is helpful when trying to convince potential investors to buy shares, so most commonly they will opt to file the application. The Advance Assurance form includes information regarding: how you plan to raise fund, your business structure, and your business activities. You will also need to file in a copy of the business plan you’ve presented to any potential individual investors.

How to Apply for EIS1

Next, when you actually issue shares to investors, you will have to submit an EIS1 form (also known as a Compliance Statement) to HMRC. This is essentially an official request for HMRC to approve the shares you issued as EIS eligible. You’ll have to complete a new application for each share issuance you make. 

If you’ve previously submitted an Advance Assurance, HMRC already has most of the information it needs from you, so you’ll only have to state that you’ve provided them with an Advance Assurance and, if applicable, send them copies of any potential documents that have changed since you did so. If you haven’t filed an Advance Assurance, you’ll have to provide more details about your company. Here’s the type of information you should be prepared to submit:  

  • A business plan (including financial forecasts)
  • Your business’s latest accounts
  • The types of trade and business activities you’re involved in, plus estimated expenses for each of those. 
  • An overview of how you meet the risk to capital condition (i.e. that you intend to use the money for growth, and that the investment constitutes a capital risk for investors). 
  • An updated copy of your memorandum and articles of association.
  • Any documents you used as part of your fundraising proposal to investors. 
  • An account of other potential agreements with your investors.
  • A list of any other venture capital schemes you may have received funds from, including amounts and dates. 
  • Other documents you might think are relevant and can help your case. 
  • If you’re applying as a Knowledge Intensive Company (see below), you’ll also have to provide evidence that you qualify as such. 

Keep in mind that you can only apply for an EIS1 if you’ve been involved in your qualifying business trade for at least 4 months. Your application must be submitted no later than 2 years from the date when this 4-month period ends, or 2 years from the end of the tax year in which you issued the shares (whichever is later). You can complete your EIS form online, send it via email, or post to Venture Capital Reliefs Team, WMBC, HM Revenue and Customs, BX9 1BN. 

Receiving An EIS2

If the SCEC approves your EIS1 submission, you will receive a document called EIS2. This is an official confirmation from HMRC that you and your investors qualify to receive EIS benefits. The EIS2 document will include a specific reference number, which you will need in order to issue EIS3 certificates to your investors.