By Claire West

The chancellor will be standing up at 12.30pm today to deliver his first full budget and one of the areas he might focus on could be the Enterprise Investment Scheme.

To try and understand what the Enterprise Investment Scheme is we caught up with the budget team at ACCA (the Association of Chartered Certified Accountants) and asked them to explain the scheme and it’s pitfalls.

“Simply put, the Enterprise Investment Scheme (EIS) is designed to support Angel investment in small businesses and has been with us for a while. With small businesses struggling to get new finance from banks, Angel investment is increasingly important. The Office of Tax Simplification has identified EIS as a relief requiring urgent simplification.

How does EIS work?

EIS offers ‘four reliefs in one’:

1. Income Tax relief: The investor may invest between £500 and £500,000 in a tax year and obtain a tax reducer of 20% of the amount of investment. Up to half of this may be carried back to the previous tax year (up to a maximum of £50,000) if the investment is made before 6 October in the tax year.
2. Capital Gains Tax Exemption: If the investor has received Income Tax relief on the cost of the shares, and the shares are disposed of after they have been held for at least three years from the date of issue of the shares, then any capital gain on the disposal of the EIS shares will be exempt from capital gains tax.
3. Capital Gains Tax Deferral: Capital gains realised on the sale of any asset may be deferred against investments in an EIS scheme; the gains crystallise when the EIS investment is disposed of.
4. Loss Relief: If the shares are disposed of at a loss, you can elect that the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed of, or any income of the previous year, instead of being set off against any capital gains.

What’s wrong with it?

The tax reliefs on offer are very generous but many businesses and investors have been reluctant to use it. Why? Well it’s probably because the scheme is fiendishly complex and full of potential traps.

In the early days of EIS (and its predecessors, the Business Start-Up Scheme and Business Expansion Scheme) the system was quite open to abuse and so, over the years, more and more anti-avoidance legislation has been thrown into the mix, making for a really complicated set of rules.

It has also historically been an extremely high-risk area for accountants and tax advisers. HMRC have been fastidious in applying the rules to the letter which can often result in difficulties.”