The Enterprise Investment Scheme (EIS) is a UK government initiative designed to help smaller, higher-risk trading companies raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
Historical Context
The EIS was introduced in 1994 as part of the Finance Act. It was designed to replace the Business Expansion Scheme (BES), which was considered to be increasingly ineffective. The goal of EIS is to stimulate entrepreneurship and innovation by making investment in smaller companies more attractive to investors.
Types and Categories
- Income Tax Relief: Investors can claim relief of 30% of the cost of shares against their income tax liability in the year the investment is made, provided the shares are held for at least three years.
- Capital Gains Tax Deferral Relief: Gains realized on a different asset can be deferred if they are reinvested in shares of an EIS-qualifying company.
- Loss Relief: If the shares are disposed of at a loss, investors can offset the loss against their income or capital gains tax.
- Inheritance Tax Relief: Shares in EIS-qualifying companies may be exempt from inheritance tax if held for two years.
Key Events
- 1994: Introduction of EIS in the Finance Act.
- 2011: Increased income tax relief from 20% to 30%.
- 2015: Removal of the requirement for the company to carry out a qualifying trade wholly or mainly in the UK.
- 2018: Focus on Knowledge-Intensive Companies (KICs) with the introduction of higher annual and lifetime investment limits for such companies.
Detailed Explanation
Mathematical Models/Formulas
The tax reliefs provided under EIS can be explained using the following formula:
- Income Tax Relief: \( \text{Relief} = \text{Investment Amount} \times 0.30 \)
For example, if an investor puts £10,000 into an EIS company, they can claim back £3,000 in income tax relief.
- Loss Relief:
If an investment is sold at a loss, the relief can be calculated as:$$ \text{Relief} = (\text{Investment Amount} - \text{Loss}) \times \text{Marginal Tax Rate} $$
Diagrams (Mermaid format)
graph TD
A[Investor] -->|Invests in| B[EIS-Qualifying Company]
B -->|Issues Shares| A
A -->|Claims Relief| C[Income Tax Relief]
A -->|Potentially Defers| D[Capital Gains Tax]
A -->|May Claim| E[Loss Relief]
A -->|Exempts from| F[Inheritance Tax]
Importance and Applicability
The EIS is crucial for supporting high-risk, early-stage businesses that may otherwise struggle to attract investment. By offering attractive tax incentives, the scheme encourages private investors to fund innovative and potentially high-growth companies.
Examples
Example 1: An investor puts £10,000 into a company qualifying for EIS. They receive £3,000 in income tax relief, reducing their net cost to £7,000.
Example 2: If the same investment is later sold at a total loss, the loss relief may further reduce the net cost depending on the investor’s marginal tax rate.
Considerations
- Eligibility: Not all companies qualify for EIS. They must meet specific criteria, including size, trading status, and use of the funds raised.
- Risk: Investing in smaller companies is inherently riskier. EIS mitigates some of the risks with tax reliefs, but the investment itself can still fail.
Related Terms
- Seed Enterprise Investment Scheme (SEIS): A similar scheme designed for very early-stage companies.
- Venture Capital Trusts (VCTs): Another type of tax-efficient investment designed to encourage investment in small, higher-risk companies.
- Business Property Relief (BPR): Relief on Inheritance Tax for certain business assets.
Comparisons
- EIS vs. SEIS: EIS is for more established companies, while SEIS targets very early-stage companies with higher risk but higher potential tax reliefs.
- EIS vs. VCT: VCTs pool funds from multiple investors to invest in a variety of companies, spreading the risk compared to EIS which involves direct investment into individual companies.
Interesting Facts
- High Growth: Many companies funded through EIS have achieved substantial growth, contributing significantly to the economy.
- Government Support: The scheme demonstrates a strong government commitment to innovation and entrepreneurship.
Inspirational Stories
Famous EIS Success: Funding Circle, a peer-to-peer lending platform, benefited significantly from EIS funding and grew to become a leading player in the industry.
Famous Quotes
“The best investment on Earth is Earth.” – Louis Glickman. Although not directly about EIS, this quote highlights the value of strategic investment.
Proverbs and Clichés
- “Nothing ventured, nothing gained.”
- “Fortune favors the bold.”
Expressions
- Tax-efficient investing: Investing in a manner that minimizes tax liability.
- Angel investor: An affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.
Jargon and Slang
- Exits: When investors sell their stake in a company, usually at a profit.
- Dry powder: Refers to readily available capital for investment.
FAQs
Q: What companies qualify for EIS? A: Companies must have gross assets of no more than £15 million before investment and must be carrying out or preparing to carry out a qualifying trade.
Q: How long must I hold the shares to benefit from tax reliefs? A: Shares must be held for a minimum of three years.
Q: Can I claim EIS relief on investments made through a crowdfunding platform? A: Yes, as long as the company and the investment meet EIS requirements.
References
- HM Revenue & Customs. (n.d.). Enterprise Investment Scheme. Retrieved from https://www.gov.uk
- Association of Investment Companies. (2024). EIS Guide.
Summary
The Enterprise Investment Scheme (EIS) plays a vital role in promoting investment in small to medium-sized enterprises by offering a suite of tax reliefs. This not only provides a financial cushion for investors but also fuels innovation and growth in the economy. Understanding the mechanics, benefits, and risks of EIS can aid investors in making informed decisions, ultimately contributing to a more vibrant and dynamic business landscape.
