The document provides an overview of the Enterprise Investment Scheme (EIS), a UK government program that provides tax relief to encourage investment in small companies. Some key points: 1. The EIS allows qualifying small companies to raise funds by issuing ordinary shares to individual investors. It provides several tax benefits to those investors. 2. Investors can receive up to 30% income tax relief on investments of up to £1 million per year. Gains on shares held for 3+ years are exempt from capital gains tax. Losses can be offset against income tax. 3. To qualify, companies must be unquoted trading companies with fewer than 250 employees and assets under £15-16 million. Funds must

1. ENTERPRISE INVESTMENT SCHEME
- A SUMMARY OF THE BENEFITS TO INVESTORS
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1 Background
The Enterprise Investment Scheme ("EIS") is a Government incentive to encourage investment by
individuals in Ordinary shares of unquoted trading companies. EIS allows companies which meet
certain conditions (qualifying companies) to raise funds by issuing Ordinary shares to individual
investors previously unconnected with the company.
This note is a summary of the EIS rules which are detailed and complex. Action should not be taken
without taking detailed advice from a tax specialist.
The funds raised must be used for the purposes of a qualifying trade or for research and
development expected to result in such a trade. Such funds must also be so used within 2 years of
the share issue. Recent changes allow the trade to be carried on anywhere in the world provided
there is a 'permanent establishment' (PE) in the UK.
A junior version of the relief called the Seed Enterprise Investment Relief (SEIS) has been
introduced from 6 April 2012 to enable small start-up businesses to raise funds where they are
finding it difficult to raise funds from traditional sources such as banks and VCs. A summary of the
rules for SEIS is available in a separate note.
The Chancellor in his March 2015 Budget has announced some further changes to EIS which are
subject to State Aid approval. These proposed changes will:
- require that companies are less than 12 years old when EIS funds are injected except where the
investment will lead to a substantial change in the company’s activity
- bring in a cap on total investment from all tax advantaged venture capital schemes of £15m
increasing to £20m for knowledge-intensive companies
-increase the employee limit for knowledge-intensive companies to 499 employees from the
current limit of 249 employees.

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2 Potential Tax Benefits
Six potential tax reliefs are available for investment in EIS companies:
(i) Income tax relief;
(ii) Capital gains tax relief;
(iii) Loss relief;
(iv) Capital Gains Tax Deferral relief;
(v) Inheritance Tax Business Property Relief;
(vi) Business Investment Relief for non-domiciled individuals.
EIS relief may be withdrawn or reduced if a subsequent event takes place which contravenes the
conditions governing relief. In broad terms, both the company and the investor must satisfy the
relevant EIS conditions for three years from the time the shares in the company are issued or from
the time the company commences trading whichever is later. In particular, the investor must not sell
the shares or receive value from the company during that period.
3 Maximum Investment
An individual can invest up to a total of £1 million in an EIS company in the current tax year
(2014/15) in order to claim Income Tax Relief. A husband and wife can each invest up to £1 million
per annum provided they meet all the other qualifying conditions. Relief can also be claimed for the
previous tax year (2013/14) of the whole amount invested. In theory, a couple can invest up to £4m
if both the current and previous tax years' EIS relief is available. The investments can be in any
number of EIS qualifying companies and is not limited to a single company.
4 Tax Benefits
(i) Income Tax Relief
A qualifying individual may deduct 30% of the amount or amounts subscribed for qualifying shares in
a qualifying company, from his total liability to income tax for the year in which the eligible shares
are issued. It is to be noted that it is not a requirement to have paid income tax at the higher rates.
The requirement is solely to have paid sufficient income tax or have a sufficient income tax liability
in the tax year to cover the 30% of the amount invested.
This relief is given for the tax year in which the investment is made at a rate of 30% of the qualifying
investment. This relief can also be carried back to the previous tax year. However, the total amount

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of income tax relief is limited to an individual's tax liability before other relief given by way of
discharge of tax.
Example: Initial EIS investment of £100,000
Invested in 2014/15 £
Gross investment in shares 100,000
Income tax relief of 30% in the tax year that
investment made
(30,000)
Net cost of investment 70,000
(ii) Capital Gains Tax ("CGT") Relief
To the extent that EIS tax relief is given and not withdrawn, any capital gain accruing to an individual
investor on the first disposal of eligible shares, which takes place three or more years after the date
of issue of such shares, is exempt from Capital Gains Tax saving tax at 28% ( or 10% if the shares
qualify for Entrepreneurs Relief).
(iii) Loss Relief
Where an investor incurs a loss on the first disposal of eligible shares, this loss (calculated after
deducting EIS income tax relief from the cost of the investment) may be set against taxable income
of the same year or the previous year at the election of the investor. Alternatively, the loss may be
offset against capital gains in the tax year of disposal. Any excess losses can be carried forward for
relief against future capital gains only ( but not income).
Example: Initial EIS investment of £100,000 and investment fails
£
Net cost of investment in shares (after
income tax relief)
70,000
Disposal proceeds Nil
Loss relief @ 45% X £70,000 (31,500)
Net investment at risk (38,500)
Note that from 6 April 2013, the introduction of capped relief means that loss relief is restricted to
£50,000 or 25% of the person's income, whichever is higher. However, the new rules provide an
exclusion for EIS (and SEIS) investments whereby the cap will not apply on losses arising on EIS (and
SEIS) shares.
(iv) CGT Deferral Relief

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Liability to CGT arising from the disposal of any asset may be deferred by investing the capital gain
(or part of the capital gain) in eligible shares in a qualifying EIS company. This investment must take
place within the period beginning one year before and ending three years after the disposal, giving
rise to the CGT liability.
Unlike the other reliefs available under EIS, CGT deferral relief is not subject to the annual £1 million
investment limit. Moreover, it is not subject to the connected persons test outlined below.
Therefore, an individual may own 100% of his company and qualify for deferral relief on any
amount invested provided the other EIS conditions are met.
The effect of CGT deferral relief for an individual is that, on making the appropriate claim to HM
Revenue and Customs (HMRC) any such liability to CGT on a chargeable gain is deferred until such
time as:
(i) The eligible shares are disposed of (other than to the investor's spouse); or, if earlier,
(ii) The investor ceases to be UK resident within three years of his subscription for the shares; or
(iii) The company into which the investment is made ceases to be a qualifying company within
three years of the subscription; or
(iv) For some other reason, the shares cease to be eligible shares.
Accordingly, whilst any gain on the eligible shares themselves will itself be exempt from CGT, this
relief enables liability to CGT on capital gains realised on the disposal of other capital assets to be
deferred where an amount equal to such capital gain is reinvested in subscription for eligible shares
in an EIS company or companies.
Example: Investor realises a chargeable gain of £100,000. Investor invests £100,000 in EIS company
£
Gross investment in shares 100,000
Income tax relief of 30% in the tax year that
investment made
(30,000)
CGT deferral relief @ 28% (28,000)
Net cost of investment 42,000
Note that the original CGT that has been deferred will be payable at the CGT rate applicable (which
could be higher than 28%) on disposal of these EIS shares (subject to any other available exemptions
or reliefs e.g. annual exemption, etc) unless the gain is reinvested again into EIS shares.
(v) Inheritance Tax Business Property Relief
Shares in EIS companies will generally qualify for Business Property Relief for Inheritance Tax
purposes at rates up to 100% after 2 years of ownership of the shares.

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(vi) Business Investment Relief for Non-Domiciled Individuals
From 6 April 2012, a UK resident non-domiciled individual is able to remit overseas income and gains
tax-free where the income or gain is invested in certain business investments, including EIS
companies. This can save income tax at up to 45% and capital gains at up to 28% on the remittance.
In addition, an investment in an EIS company will also go towards meeting the required investment
for a Tier 1 visa (investment required of £2 million) for the investor and his family to come and live
and work in the UK.
5 Who qualifies for relief?
Subject to certain exemptions, to be a qualifying individual for EIS relief, an individual must not be,
nor have been within the previous two years, connected with the qualifying company, or become
connected with it within the next three years, if such an individual is to receive and retain most of
the EIS tax reliefs.
Broadly, an individual will be treated as "connected" with a company if:
 Either the individual or his associates are an employee, partner or paid director of the
qualifying company or its subsidiaries. However, an individual may be a paid director of a
qualifying company provided that at the time he subscribed for the eligible shares, he was not,
and had not previously been, otherwise connected with the qualifying company nor with the
trade carried on by that qualifying company; or
 Either the individual or his associates "control" the eligible company or possess more than 30%
of the issued ordinary shares or voting power in the qualifying company or any rights carrying
entitlement to more than 30% of the assets available for distribution to equity holders.
Associate is defined to include business partners, trustees of any trust in which the investor is a
settlor or beneficiary and relatives. Relatives for this purpose include spouse and civil partners,
parents and grandparents, children and grandchildren. Brothers, sisters, nephews, nieces, uncles or
aunts are not "associated" for this purpose.
6 Restrictions on EIS Relief
Broadly speaking, a withdrawal or reduction of relief is made where, during the period ending
immediately before the third anniversary of the issue date of the shares or, if later, the third
anniversary of the date on which the company commenced its trade:
 The investor ceases to be a qualifying individual (as described above);

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 The investor disposes of some or all of his EIS shares;
 The investment company ceases to be a qualifying company;
 The shares cease to be qualifying shares; or
 Value is received from the company by the investor.
Examples of when value is deemed to be received include:
(a) The company paying or redeeming any shares belonging to the investor;
(b) the company repaying a debt to the investor;
(c) the company releasing any liability of the investor to the company; or
(d) the company making a loan to the investor or providing any benefit of facility to the investor
7 Which companies can qualify?
In order for its investors to be able to claim, and keep, the EIS tax reliefs relating to their shares, the
company which issues the shares has to meet a number of rules regarding the kind of company it is,
the amount of money it can raise, how and when that money must be employed for the purposes of
the trade, and the trading activities carried on. The company must satisfy HMRC that it meets these
requirements, and is therefore a qualifying company.
The kind of company which can use EIS to raise money:
 Must be an unquoted company at the time the shares are issued. That means it cannot be listed
on the London Stock Exchange or any other recognised stock exchange. It can subsequently
become a quoted company without the investors losing relief. AIM and PLUS markets are not
considered to be recognised exchanges for this purpose.
 Must not be controlled by another company (or another company and any person connected
with that company). Nor must there be any arrangements in existence for it to be controlled by
another company at the time the shares are issued. Control is widely defined for this purpose
but generally covers 50% or more of the shares of the company.
 May have subsidiaries, but if it does they must all be qualifying subsidiaries, ie the company has
more than 50% of the ordinary share capital of the subsidiary, and it is not controlled (by other
means) by another company. (If the EIS company has subsidiaries carrying on the qualifying
trade or is a property management subsidiary that must be at least a 90% subsidiary.)
 Must be a "small company". The measure of whether a company is "small' is the Gross Assets
Test. The Gross Assets of the company – or of the whole group if it is the parent of a group –
cannot exceed £15 million immediately before any share issue and £16 million immediately
after that issue.
 Must have fewer than 250 full-time employees (or their equivalents) at the time the shares are
issued.

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 Can be either a company carrying on the qualifying trade, or the parent company of a trading
group. The trade can be carried on either by the company issuing the shares or a subsidiary, but
if it is carried on by a subsidiary, it must be at least a 90 per cent subsidiary.
 The maximum that a company can raise via EIS qualifying shares is £5 million in any 12 month
period.
 The company must meet the 'no disqualifying arrangement' rules -see Appendix 2.
8 Use of EIS Funds
The money raised by the share issue can be used either for the purpose of an existing qualifying
trade or for the purpose of preparing to carry on such a trade. Where the shares are issued before 6
April 2011 the trade, or the preparation for it, must be carried on wholly or mainly in the UK. That
requirement is removed for shares issued on or after 6 April 2011. The requirement after this date is
to have a "permanent establishment” or PE in the UK (see below).
Alternatively it can be used to carry on research and development intended to lead to such a
qualifying trade being carried on.
The money raised by the share issue must also be employed for the purposes of the trade or
research and development within two years of the shares being issued (or within two years of the
trade commencing, if that is later). If these requirements are not met then the investors will not be
eligible for relief on the cost of their shares, and any relief given will be withdrawn.
The funds raised cannot be used to acquire the shares of another company. However, this does
not prevent the use of the money where a 90% subsidiary is acquired and that subsidiary then goes
on to use the money for a qualifying business activity carried on by it.
9 Trading Activities
The trade must be conducted on a commercial basis with a view to the realisation of profits.
Most trades qualify, but some do not. Those that do not are termed 'excluded activities' and are:
 Dealing in land, in commodities or futures in shares, securities or other financial instruments
 Dealing in goods, otherwise than in an ordinary trade of retail or wholesale distribution
 Financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase
financing or any other financial activities
 Leasing or letting assets on hire ( including letting ships on charter)
 Receiving royalties or licence fees (though if these arise from the exploitation of an

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 intangible asset which the company itself has created, that is not an excluded activity)
 Providing legal or accountancy services
 Property development
 Farming or market gardening
 Holding, managing or occupying woodlands, any other forestry activities or timber production
 Shipbuilding
 Coal production
 Steel production
 Operating or managing hotels or comparable establishments or managing property used as an
hotel or comparable establishment
 Operating or managing nursing homes or residential care homes, or managing property used as
a nursing home or residential care home
 Providing services to another person where that person’s trade consists, to a substantial extent,
of excluded activities, and the person controlling that trade also controls the company providing
the services
 The subsidised generation or export of electricity
 The subsidised generation of heat or subsidised production of gas or fuel
A company can carry on some excluded activities, but these must not be 'substantial' part of the
company’s trade. HMRC take 'substantial' to mean more than 20 per cent of the company’s
activities. There are various tests to check whether the 20% limit has been breached.
There is no requirement that the qualifying company is resident in the UK, but for shares issued on
or after 6 April 2011, the company must have a ‘permanent establishment’ or PE in the UK if it is an
overseas company. Where the subscription is in an overseas company which is part of a group, it is
the company in which the subscription for shares is made that has to have a PE in the UK. PE is
defined per the definition in Article 5 of the OECD Model Convention (double tax treaties). Note
that the subscription money does not need to be spent in the UK for the company to qualify.
There is also a requirement for the EIS company to meet the 'financial health' requirement that the
company is not in "financial difficulty". This is defined in the European Community Guidelines on
State Aid. The definition of a firm in difficulty is quite detailed and complex.

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10 Obtaining HMRC Advance Assurance
Companies can apply to HMRC under the Advance Assurance scheme, whereby they can submit
their plans to raise money, details of their structure and trade etc. before the shares are issued, and
HMRC 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 the
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 HMRC is also useful for companies to show to
potential investors.
Once the shares are issued – irrespective of whether or not an advance assurance has been given -
the company has to complete form EIS1- the compliance statement and send it to HMRC requesting
them to give authority to issue a compliance certificate.
Note that a form EIS1 cannot be accepted by HMRC unless the company has been trading for at least
four months. And it also cannot be accepted if it submitted later than two years after the end of the
year of assessment in which the shares were issued.
If HMRC accepts that the company, its trade, and the shares all meet the requirements of the
Scheme, it will issue a form EIS2- (the authority to issue a compliance certificate) to that effect, and
supply sufficient forms EIS3- ( the compliance certificate) for the company to complete and 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 reliefs for
investors. Care should be taken not to issue shares on different days as each issue of shares will
require a separate application.
Jay Sanghrajka
Price Bailey LLP
March 2015

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Appendices

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Appendix 1
Common Pitfalls of Using the EIS
The EIS rules are complex and HMRC interpret the rules quite strictly and even the slightest
transgression can lead to relief being denied or lost.
The following areas are some of the more common errors made by investors using the EIS:
 Shares are not paid for in cash or are not fully paid up.
 Failure to use new Ordinary shares i.e. second hand shares.
 Issuing EIS 3 certificates without having HMRC approval.
 The individual cannot convert loans to the company into EIS shares because they would fail to
subscribe for shares – problem with start-ups.
 "Accidental‟ loans to the company.
 The individual is appointed as a director before subscribing for shares and is therefore
connected with the company. This is not always easy to handle given that directors have to be
appointed on formation of a company.
 The individual must not have signed trading contracts on behalf of the company before he
subscribes for his EIS shares. If he does then he would not qualify for EIS relief as he would have
been previously involved in carrying on the company's trade .possibly as a ‘shadow director’.
 The individual is inadvertently connected with the company because the associates rule includes
business partners of, say, a film partnership scheme.
 During the company's three year relevant period there are arrangements in place where the
company will, or even could, come under the control of another company even if these
arrangements will not take effect until after the relevant period has passed.
 Shares with preferential rights are created inadvertently, for example by issuing restricted
shares to employees. The existing EIS shares would as a result have a preferential right that
could be caught.
 The shareholders' agreement states that the EIS shareholders get their money back before
another class of shareholders in the event of winding up.
 The shares are not issued properly because the investor's name has not been entered onto the
register of members correctly or at all.
 The share certificate has not been issued properly or at all.
 There is a share reorganisation within the company which means that the “EIS shareholders” no
longer qualifying for EIS relief because they hold more than 30% of the ordinary share capital,
even if this is only for a short period of time.

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 The company uses premises which are owned by an EIS shareholder or an associate. If the
company pays more than market rent, the EIS shareholder is likely to receive value from the
company.
Appendix 2
Disqualifying Arrangements
The "no disqualifying arrangement" rules were introduced for shares issued after 6 April 2012.
These were introduced by the Government to prevent EIS being used to provide tax relief to
investors with little or no commercial purpose. It is also intended to prevent benefits being given to
an entity or project which would not itself qualify for EIS or whose owners do not want to dilute
their shareholding. The idea is to prevent EIS relief being given to companies which would be
unlikely to exist in the first place or would be unlikely to carry on the particular activities in question.
HMRC’s Venture Capital Schemes Manual offers examples of cases which potentially fall within these
anti-avoidance provisions:
 Where a business appears to be fragmented in a way which is commercially unusual
with the result that there is a company which ( apart from this test) meets the qualifying
conditions for EIS
 Where a transaction which would normally be expected to be between two parties ,
involves three (or more) parties , where the additional party is a company which ( apart
from this test) meets the qualifying conditions for EIS
 Where the economic substance of a company’s activity appears to be at odds with its
form ( for example where contractual arrangements are put in place which in reality are
no more than loan or credit facilities dressed up to appear otherwise).
The provisions are somewhat complex and specific advice should be sought on the applicability of
these provisions.