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Raise funding with the UK’s Enterprise Investment Scheme (EIS). Learn how to qualify and attract tax-efficient investors.
For growing businesses in the creative and innovation sectors, securing investment can be the difference between breakthrough success and missed opportunities. The Enterprise Investment Scheme (EIS) is one of the UK's most powerful tax-efficient investment vehicles, yet many businesses remain unaware of its potential.
The statistics speak volumes: since its introduction in 1994, EIS has facilitated over £31 billion in investment across thousands of qualifying companies. However, navigating the scheme's requirements and maximising its benefits requires strategic planning and expert guidance.
The Enterprise Investment Scheme is a government-backed initiative. Administered by HMRC, EIS serves a dual purpose: it provides businesses with access to crucial growth capital while rewarding investors with significant tax advantages for supporting early-stage and expanding companies.
It offers substantial tax reliefs to individual investors and up to £5 million yearly to companies.
The scheme specifically targets businesses that traditional lending institutions might consider too risky or innovative for conventional financing. This makes EIS particularly helpful for creative industries, technology startups, and innovative manufacturing companies that require patient capital.
Crucially, EIS isn't simply about tax avoidance – it's about incentivising productive investment in the real economy. The scheme requires investors to hold their shares for a minimum of three years, ensuring that capital flows toward genuine business development rather than short-term speculation.
Companies seeking EIS investment must meet some basic criteria that ensure the scheme supports genuine entrepreneurial activity.
Your business must:
Age restrictions apply differently depending on your business model.
Knowledge-intensive companies – those whose intellectual property, skilled employees, or research and development activities form the core of their business – can raise EIS investment up to seven years after their first commercial sale. This is a longer timeline than for standard companies, which is usually five years.
Some sectors do not qualify for investment; property development, financial services, legal services, and accountancy fall outside the qualifying parameters. Similarly, businesses involved in coal and steel production, shipbuilding, or those receiving certain types of state aid cannot access EIS funding.
There are also restrictions on your group structure. Companies cannot qualify for EIS funding if:
Individual investors seeking EIS tax reliefs must satisfy their own set of requirements.
Investors must subscribe for new shares issued by the company specifically to raise money for business purposes. Purchasing existing shares from current shareholders doesn't qualify for EIS relief.
Critically, the minimum holding period of three years means investors cannot sell their shares, transfer them, or receive value from the company during this period without losing their tax reliefs.
For investors, the restrictions centre on preventing abuse of the system.
As you might expect, business owners, their families, and business partners cannot claim EIS relief on their own companies. An investor also cannot hold more than 30% of the company's shares, voting rights, or economic rights, nor can they be an employee or director of the company (with limited exceptions for non-executive directors).
Venture capital fund managers, business angels with significant existing stakes, and family members of business owners typically cannot claim EIS relief. Additionally, investors who receive any benefit or value from the company beyond their shareholding risk losing their tax advantages.
The purpose test means that investment funds must be used entirely for business growth. This means expanding operations, developing new products, entering new markets, or acquiring assets essential to business development.
Your shares must be full-risk ordinary shares which:
EIS funds cannot be used to repay existing loans, purchase existing shares from current shareholders, or finance activities that don't directly contribute to business expansion.
Ordinary shares represent the most straightforward investment. These shares cannot carry preferential rights to dividends or assets on winding up beyond what’s necessary. Investors receive voting rights proportionate to their shareholding and participate in the company's growth through capital appreciation.
Preference shares can qualify for EIS relief provided they don't carry excessive preferential rights. HMRC scrutinises preference share structures carefully to ensure they represent genuine risk capital rather than debt financing in disguise.
Convertible securities – which can be converted into ordinary shares under specific conditions – qualify for EIS relief, provided the conversion terms are reasonable. The conversion mechanism cannot be so favourable to investors that it effectively guarantees returns.
All EIS investments must constitute risk capital, meaning investors face a genuine possibility of loss if the business fails or underperforms. Arrangements that provide guaranteed returns, excessive security, or preferential treatment that significantly reduces investment risk may not qualify for EIS relief.
The tax advantages available through EIS create a compelling proposition for investors willing to support growing businesses.
Investors can claim income tax relief at 30% on qualifying EIS investments up to £1 million per tax year. For knowledge-intensive companies, this limit increases to £2 million annually. This relief directly reduces the investor's income tax liability pound-for-pound, not merely their taxable income.
For example:
An investor makes a £100,000 EIS investment. They immediately claim £30,000 income tax relief, reducing their effective investment cost to £70,000.
If they lack sufficient income tax liability in the investment year, they can carry back the relief to the previous tax year, providing additional flexibility for tax planning.
EIS investments held for at least three years qualify for complete capital gains tax exemption on disposal.
This means investors pay no capital gains tax on profits from successful EIS investments, regardless of the gain size. For higher-rate taxpayers facing 20% or 28% capital gains tax rates, this exemption significantly enhances investment returns.
Additionally, investors can defer capital gains tax on other investments by reinvesting the gains in EIS-qualifying companies. This deferral continues until the investor disposes of the EIS shares, potentially allowing indefinite deferral through successive EIS investments.
If an EIS investment fails, investors can claim loss relief against their income tax or capital gains tax. After accounting for initial income tax relief, investors can offset net losses against their other taxable income or gains, providing valuable downside protection.
EIS shares held for at least two years qualify for 100% inheritance tax relief, removing them from the investor's estate for inheritance tax purposes. This benefit makes EIS particularly attractive for estate planning, allowing investors to support growing businesses while reducing future inheritance tax liabilities.
While investor benefits receive significant attention, EIS offers compelling advantages for growing businesses seeking investment.
EIS dramatically expands your potential investor pool by making investment more attractive through tax reliefs. Individual investors who might otherwise be reluctant to invest in early-stage or expanding businesses become more willing to take risks when supported by 30% income tax relief and capital gains tax exemption.
This expanded investor base often translates to more competitive investment terms. When investors benefit from substantial tax advantages, they may accept lower returns or more business-friendly terms than they would demand from non-tax-advantaged investments.
The patient capital nature of EIS investment, with its minimum three-year holding period, aligns investor and business timelines. Unlike some forms of financing that demand quick returns, EIS investment allows businesses to implement longer-term growth strategies without immediate pressure for exits or distributions.
EIS qualification serves as a quality mark, demonstrating that your business has satisfied HMRC's stringent requirements for genuine commercial activity, appropriate risk levels, and growth potential. This government endorsement can enhance credibility with other stakeholders, including customers, suppliers, and employees.
The scheme's structure also attracts sophisticated investors who understand business development challenges and can provide valuable expertise alongside their capital. Many EIS investors are successful entrepreneurs or business professionals who offer strategic guidance, industry connections, and operational experience.
Navigating EIS requirements while maximising the scheme's benefits requires careful planning and expert guidance. The interplay between company qualification criteria, investor requirements, and tax relief structures creates numerous opportunities for optimisation – but also potential pitfalls for the unwary.
Whether you're a growing business seeking investment, understanding EIS mechanics is just the beginning. Success requires strategic implementation tailored to your specific circumstances, timelines, and objectives.
If EIS isn’t an option for you, there are other HMRC and non-state incentives that might offer funding or tax relief. The R&D tax credit incentive is available to companies carrying out R&D, giving up to a third of your R&D spending back. There are also grant funding options for companies looking to receive funding for a specific project.
Get in touch with our team if you want to discuss your options for funding.
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Please contact us to discuss how working with Myriad can maximise and secure R&D funding opportunities for your business.
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