Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a UK government programme that encourages investment in growing businesses by offering tax reliefs to individuals who purchase new shares in qualifying companies. Administered by HMRC, EIS is one of the most widely used equity financing tools in the UK.

EIS is the larger counterpart to the Seed Enterprise Investment Scheme (SEIS) , which targets the earliest-stage companies with higher tax relief rates but lower investment limits.

How EIS Works

A qualifying company issues new ordinary shares to individual investors. In return, the investors receive a package of tax reliefs from HMRC. The company applies for compliance certificates and issues EIS3 forms to investors, who then claim the reliefs through their self-assessment tax returns.

Tax Reliefs for Investors

Example

An investor puts £500,000 into EIS-qualifying shares:

• Income Tax relief: £150,000 (30% of £500,000) — reducing the effective cost to £350,000
• If the investor also defers a £500,000 capital gain from selling another asset, the CGT on that gain (up to £100,000 at 20%) is postponed until the EIS shares are sold
• If the EIS shares are held for 3+ years and sold at a profit, the gain is entirely tax-free
• If the company fails, loss relief is available on the net cost after Income Tax relief

CGT Deferral

One of the most powerful EIS reliefs is Capital Gains Tax deferral. An investor who has realised a gain on any asset can defer the tax by reinvesting some or all of the gain into EIS shares. The deferral lasts until the EIS shares are disposed of, at which point the original gain becomes taxable again — unless the investor reinvests into further EIS shares.

There is no upper limit on the amount of gains that can be deferred through EIS.

Limits and Conditions for Investors

• Maximum investment qualifying for Income Tax relief: £1 million per tax year (or £2 million if the amount above £1 million is invested in knowledge-intensive companies)
• Shares must be held for at least 3 years
• The investor must not be connected to the company — meaning they cannot hold more than 30% of the company’s shares, voting rights, or assets on a winding up
• The investor cannot be a paid employee or paid director of the company (unpaid directors may qualify)
• Carry-back is available to the previous tax year

Qualifying Company Rules

Company Requirements

• Must have a UK permanent establishment
• Must have been trading for fewer than 7 years from the date of first commercial sale (or 10 years for knowledge-intensive companies)
• Gross assets must not exceed £15 million before the share issue (and £16 million immediately after)
• Must have fewer than 250 full-time equivalent employees
• Lifetime fundraising limit: £12 million through EIS and other venture capital schemes combined (£20 million for knowledge-intensive companies)
• Must not be listed on a recognised stock exchange (AIM-listed companies can qualify)
• Must be independent — not controlled by another company

Knowledge-Intensive Companies

Companies that meet the knowledge-intensive criteria benefit from higher limits. To qualify, a company must meet either:

• Spending condition: At least 15% of operating costs on research and development (R&D) in one of the 3 preceding years, or 10% in each of the 3 preceding years
• Innovation condition: Creating intellectual property and the company’s main business is based on that IP

Knowledge-intensive companies can raise up to £20 million through venture capital schemes and investors can claim relief on up to £2 million per year.

Excluded Trades

The same trades excluded from SEIS are also excluded from EIS, including:

• Property development and land dealing
• Financial services and insurance
• Legal and accountancy services
• Farming and market gardening
• Hotels, nursing homes, and residential care
• Energy generation (with exceptions)
• Leasing activities

The EIS Process for Companies

1. Confirm eligibility — Check the company and its trade against all EIS requirements
2. Apply for advance assurance (optional) — HMRC confirms the company should qualify before shares are issued
3. Issue shares to investors and register the allotment at Companies House
4. Submit form EIS1 to HMRC within the required timeframe after shares are issued
5. Receive and distribute EIS3 certificates to investors for their tax returns

Advance assurance is not mandatory but is strongly recommended, particularly for angel investment rounds where investors want certainty before committing funds.

Impact on the Company’s Accounts

EIS funding is equity, not debt. On the balance sheet:

• The nominal value of shares issued appears in share capital
• Any premium paid above nominal value goes to share premium reserve
• There are no interest payments or scheduled repayments, unlike a business loan

The trade-off is dilution of the founders’ ownership. Each EIS round creates new shares, reducing the percentage held by existing shareholders.

EIS vs Other Funding Options

For early-stage companies, using SEIS first (up to £250,000) and then progressing to EIS is a common strategy.

Common Compliance Issues

• Connected investor — If an investor acquires more than 30% of the company, all their EIS relief is at risk
• Receiving value — The company must not provide the investor with any benefit beyond normal dividends (e.g. loans, discounted services, or guarantees)
• Disqualifying arrangements — Pre-arranged exits, buyback commitments, or guaranteed returns can disqualify the entire investment
• 3-year holding period — Disposing of shares within 3 years triggers clawback of Income Tax relief and loss of CGT exemption
• Trade ceasing — If the company stops its qualifying trade within 3 years, reliefs may be withdrawn

Keeping detailed accounting records and working with an EIS-experienced adviser reduces the risk of compliance failures.

EIS Funds

Rather than investing directly into a single company, some investors use EIS funds managed by professional fund managers. These funds pool money from multiple investors and spread it across a portfolio of EIS-qualifying companies. Benefits include:

• Diversification — Reduces the risk of any single company failing
• Professional management — Fund managers conduct due diligence and manage the portfolio
• Convenience — The fund handles all HMRC paperwork

The downside is management fees (typically 1% to 2% per year) and less control over which companies receive the investment.

Claiming EIS Relief

Investors claim EIS relief by:

1. Receiving the EIS3 certificate from the company
2. Including the details on their self-assessment tax return
3. HMRC processes the claim and adjusts the tax liability or issues a refund

Relief can also be claimed by writing to HMRC directly if the self-assessment deadline has passed but the claim is within the time limit.