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EIS qualifying conditions need to be met by both company and investor for duration of the holding period of three years;

Company

• Company must not be controlled by or control another company
• Company must be unquoted at the time shares are issued
• Company has fewer than 250 employees
• Company has gross assets that do not exceed £15m before investment of £16m after investment
• The investment must be into new shares (investor cannot buy existing shares)
• The investee company uses the money raised within 24 months in the qualifying trade
• Any investment of EIS funds does not exceed more than £5m in any one company in any one year

Investor

• All shares paid up in full, in cash, when issued
• Shares must be full risk shares (not redeemable)
• Investor must not be connected to the company during the holding period. An individual is considered connected to a company if they directly or indirectly possess or are entitled to acquire more than 30% of the ordinary share capital of the company (or any subsidiary) or hold more than 30% of the voting power in the company or any subsidiary, or such rights as would, either in the event of a winding up or in any other circumstances, entitle the individual to receive more than 30% of the assets of the company which would then be available for distribution to equity holders of the company.

Enterprise Investment Schemes are administered by HMRC in the small companies enterprise centre (SCEC) department. The SCEC decides if a company and share issues qualify for EIS. There is an advance assurance scheme whereby companies can submit their plans to raise money, details of structure and trade etc before the shares are issued and the SCEC will advise on whether or not the proposed issue is likely to qualify. Companies are not required to obtain such an assurance, but companies, particularly those using EIS for the first time, may consider it prudent to do so. It gives an opportunity to spot any problems before shares are issued, and an assurance from the SCEC is also useful for companies to show to potential investors. Please note, requests can be dealt with only if they come from the company’s secretary or directors or from a person authorised by them to negotiate with HMRC on their behalf. Please find the form for advance assurance scheme at https://www.gov.uk/government/publications/enterprise-investment-scheme-advance-assurance-application-eisseisaa. Once this has been approved, you will then need to submit EIS1 form and send it to the SCEC, this will not be accepted by the SCEC unless the company has been trading for at least four months and cannot be accepted if it is submitted later than two years after the end of assessment in which the shares were issued. If the SCEC accepts that the company, its trade, and the shares all meet the requirements of the scheme, it will issue a form EIS2 to that effect, and supply sufficient forms EIS3 for the company to send to the investors so they can claim tax relief. This process is repeated each time a company issues shares which it wishes to attract EIS relief for investors.

The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.  No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.