The Government has put great store in the Enterprise Investment Scheme (EIS) providing a stimulus to investment into entrepreneurial companies. The Finance Bill published on 29 March 2012 extended the scope of the relief, which allows investors to reduce income tax liability by 30% of the amount invested, to not pay capital gains tax on a disposal of shares after three years or three years after commencement of trade and can reduce or eliminate inheritance tax on such shares on death.

Individuals are now able to invest up to £1 million from this tax year and claim EIS relief on the investment (the limit having gone up from £500,000 for the year ended 5 April 2012) as well as carrying back the value of any investment into the prior year where the relief has not been used up in the prior year.

Other rules have also been liberalised to make the scheme more effective but these require EU State Aid Approval which is expected by the time of the Royal Assent to the Finance Bill in July 2012. These changes include the increase of the employee limit of the company being invested in to fewer than 250 from fewer than 50 at the time of issue of the shares. It also includes an increase of the threshold of gross assets of the company to no more than £15 million before the investment and £16 million immediately after (from the current limits of £7 million and £8 million) and, very importantly, an increase of the maximum amount which can be raised by a company under EIS to £5 million in a tax year from £2 million. It is this which will significantly improve the effect of this scheme allowing larger fundraisings for growth.

But it is very disappointing that at the same time the Finance Bill brings in provisions which take the relief away in two situations where it was providing valuable support to growing companies. An EIS qualifying company cannot now utilise EIS funds raised to acquire another company. EIS funds can still be used to acquire a business or as working capital for an acquired company.

In addition a new “disqualifying arrangements” test has been added which may hit many EIS structures, particularly in the media fields of film, TV and music. A disqualifying arrangement is where a majority of EIS funds raised is paid to or for the benefit of the party to the arrangements or a person connected to such a party. It will also be where, in the absence of arrangements, it would have been reasonable to expect the business activity would have been carried on as part of another business by a person who is a party to the arrangements or a person connected with such a party.

For further information on EIS or this article, please contact Victor Hawrych, Partner
E: victor.hawrych@edwincoe.com T: +44 (0) 20 7691 4000
Edwin Coe LLP – Winner of the EIS Association Law Firm of 2010 and runner up in 2011

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