05/05/2011

Is Enterprise Investment Scheme the fuel for economic recovery?

By Matt Watts, Associate Director, Corporate Tax at Smith & Williamson

There have been a number of significant and favorable changes to the Enterprise Investment Scheme (EIS), which provides tax relief for individuals investing for equity in qualifying companies.

The new rules — announced in March’s Budget — will substantially increase both the number of companies that can qualify for EIS investment, and also the amount individuals can invest through EIS. In short, the Government sees EIS as playing a key role in ensuring that the UK economic recovery continues, by encouraging individuals to invest in small and medium-sized companies.

Extending the relief

The Government is extending EIS, both in terms of the criteria for investee companies that qualify, and also for those individuals investing. Unless specified otherwise below, most of the announced changes will take effect for shares issued after 5 April 2012, subject to EU state aid approval.

Here’s a brief summary of the changes:

Investee company criteria

- Number of full-time employees in the company (or group as appropriate) increased from 50 to 250

- Increase in the gross asset threshold for qualifying companies (or group as appropriate) to £15m immediately before the investment

- Relaxation of the requirement that qualifying companies must be carrying on their trade “wholly or mainly in the UK” — for shares issued after 5 April 2011, the company issuing the shares will be required to have a UK permanent establishment only

- Increase in the annual amount a qualifying company can raise in total under venture capital schemes (comprising both EIS and VCTs) from £2m to £10m.

Rules for investors

- Increase in the rate of EIS income tax relief for an individual from 20% to 30% (bringing relief in line with that available for VCTs (Venture Capital Trusts )) for shares issued after 5 April 2011;

- Doubling in the annual amount qualifying for income tax relief that an investor can invest under the EIS from £500k to £1m.

What do these changes mean?

Clearly, the number of companies able to benefit from EIS will increase dramatically as a result of the announced changes. In particular, we anticipate that more AIM (Alternative Investment Market) - listed companies will now also be able to qualify for EIS investment, representing an important additional source of capital for many.

For investors, the enhanced EIS tax reliefs, together with the doubling of the CGT (Capital Gains Tax) entrepreneurs’ relief lifetime limit to £10m, should provide greater incentive to invest in private companies. The generous tax relief offered by EIS should ensure that individuals are generally willing to take greater risks on investing in small companies, while the extension of the size criteria for qualifying companies should also provide access to EIS for those investors wanting to back larger companies, often perceived to be lower risk. All in all, the changes are clearly seen by the Government as an important part of its policies aimed at stimulating enterprise and economic recovery.

If you are interested in investing through EIS or you are a company looking for funding under the scheme, contact Matt Watts on 020 7131 4790 or email matt.watts@smith.williamson.co.uk

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