How small businesses can tap the EIS

Small businesses can benefit from the enterprise investment scheme (EIS), but they must tread carefully.

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The small print has put investors off the EIS

Some 3,920 small companies raised £1.93bn through the enterprise investment scheme (EIS) during the 2017-2018tax year, according toHM Revenue & Customs. That marked a 1.5% rise on the previous year, but analysts say the EIS should be doing much better given recent restrictions on pension tax reliefs, which are prompting savers to find new tax-efficient investments.

Alex Davies, the founder of Wealth Club, a specialist EIS adviser, blames the "constant tinkering with the rules" for the tiny increase, pointing to a series of changes to the small print of the EIS in recent years. He predicts the data for 2018-2019 will show EIS capital raising slipping back.

In that case, small businesses hoping to use the EIS to raise much-needed funds will need to work hard to achieve their financing targets. In principle, however, companies with EIS status should find it easier to raise money from investors, who get very generous tax reliefs in return for stumping up. How, then, to exploit the potential of the EIS most successfully? The first step is to be sure your business qualifies for the scheme, particularly since the rules have been tightened. In most cases, your business must be less than seven years old, have less than £15m in assets, and employ no more than 250 people. Certain industries, including financial services, energy generation and property development, are excluded from the scheme. And you can't usually raise more than £5m in any one tax year.

Importantly, HMRC will not certify that a business meets its EIS criteria in advance: to secure EIS status, you will need to submit a compliance statement to the tax authorities once the share issue has been completed. This means you can't tell potential investors that EIS benefits are guaranteed. However, it is possible to apply to HMRC for "advance assurance", an official document that shows the business could qualify, providing investors with valuable reassurance. Even if you don't have this document, you are allowed to tell investors that you believe the business meets the EIS eligibility criteria.

Don't assume that your potential investors understand the value of the EIS, however, particularly if you're appealing directly to individuals through an equity-based crowdfunding platform. Your pitch to investors should make it crystal clear that you will be applying for EIS status and set out the detail of the tax reliefs they may qualify for as a result.

Keep investors supportive by making it simple for them to claim their reliefs not least because you may want to raise more capital in the future. Once you've successfully achieved EIS status, HMRC will supply you with the forms that investors need to claim their tax relief through theself-assessment tax system. You'll need to provide these forms to your investors.

The key is to be sure investors understand your business is EIS-eligible, that they know what this is worth to them, and that it's as easy as possible for them to secure the benefits. The more straightforward you can make the EIS process, the less investors will be put off by the potential complexities of the scheme's small print. Seeking advice from a professional tax specialist makes sense.

EIS or SEIS?

The application process for the SEIS is similar to that for the EIS, so you won't be able to guarantee investors that they'll qualify for the scheme's tax breaks. But you can still apply for advance assurance.

It's important to understand the much narrower eligibility criteria for this scheme, however. It's usually only an optionfor those businesses with assets of less than £200,000 and fewer than 25 employees. You can'tuse the scheme if youhave already received investment from the EIS or through venture capital trusts, and you can raise a maximum of £150,000.

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