A guide for community interest companies

What is the Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) allows individual investors in certain companies to obtain enhanced tax relief based on the amount they invest in those companies. Individual investors in EIS companies can claim:

• 20% initial income tax relief on the investment
• Delay capital gains tax on other assets sold
• Pay no capital gains tax on the shares bought
• Tax relief for any losses made on the shares bought

What’s in it for me?

If you are operating or starting a qualifying community interest company then offering your potential investors the opportunity to obtain enhanced tax relief on their investment makes them more likely to invest in you than the competition. Such an investment will also tie in investors for the long-term, making them true partners of the organisation. Your company may raise up to £2 million in a 12 month period.

The tax relief available for this type of support can also put you on a par with charities who can offer supporters Gift Aid tax relief on donations made. For small social enterprises, the investment should be viewed as a ‘long-term partner donation’ rather than a purchase of part of a valuable business.

Who can do it?

Any individual UK tax-paying investor in a qualifying company can obtain tax relief on up to £500,000 of investment as long as they have limited connections with the company. 

Am I a qualifying company?

Companies must be trading for-profit companies not operating certain businesses. Companies must also NOT:

• Be limited by guarantee but are limited by shares
• Quoted (but companies listed on AIM or PLUS quoted markets may qualify)
• Controlled by another company
• Have more than £7 million of assets
• Have more than 50 employees
• Businesses not allowed under EIS

Most trades (not investment activities) qualify, but some do not, including:

• Most land or property businesses
• Dealing in the financial markets (the ‘City’)
• Legal or accountancy
• In certain types of heavy industry or agriculture
• Operating nursing, care homes or hotels

How do I do it?

If you feel comfortable dealing with forms and accountancy, legal & tax concepts then there is no requirement to take advice from an accountant. That said, we strongly recommend you do so as your investors will not be amused if they do not obtain their enhanced tax relief.

In the first instance, it is advisable to obtain advance assurance from the Small Company Enterprise Centre.  One way to do this is by completing and submitting Form EIS (AA). This form required basic information on:

• Who the investors are that wish to claim tax relief, and
• The structure and nature of the company in which they are investing

Once advance assurance has been granted, investors will have comfort that the shares to be issued will qualify for EIS reliefs.

Once the shares have been issued the company must then complete EIS1 and submit it to the Small Company Enterprise Centre within the specified time limits. If the Small Company Enterprise Centre confirms that the shares meet all the requirements it will issue one copy of Form EIS2 and copies of EIS3 to the company.

The company must then send a copy of Form EIS3 to each investor to allow them to claim tax relief on their tax return.

Remember

As with all legislation that offers generous tax reliefs or is complex, you should either take advice from a professional or read the HMRC guidance on EIS (see link below) as well as the relevant legislation.

Key sources of information

CIC Association
www.cicassociation.org.uk
john@cicassociation.org.uk
020 3262 3044

Small Company Enterprise Centre
HM Revenue & Customs
www.hmrc.gov.uk/eis
0115 974 1250

Useful links

Form EIS(AA) www.hmrc.gov.uk/forms/eis-aa-bw.pdf
Form EIS1  www.hmrc.gov.uk/forms/eis1.pdf