Enhancements to the Enterprise Investment Scheme (EIS) is one of the most useful policies introduced in the 2011 Budget – for business owners and tax payers looking to shelter their income from the current 50% tax rate. In addition to the increase in income tax relief from 20 per cent to 30 per cent making it more valuable to higher rate tax payers, access to the EIS scheme has also been widened.

How to qualify for EIS

– Rules for business owners

Small businesses seeking to attract investment through EIS need to register for the scheme and meet certain criteria as follows:

• Companies must be unquoted and not be under the control of another company or of a company and persons connected with that company.
• It must be a qualifying trading business or be the parent company of a qualifying trading group. Certain industries – for instance companies dealing in property – do not qualify.
• At least 50% of the business’ qualifying trade and the businesses’ permanent location must be in the UK.
• Gross assets should be less than £7 million before the EIS share issue – the limit will rise to £15m after April 2012.
• Also from April 2012, employee numbers allowable will increase from 50 to 250 and up to £10million in funding can be raised in 12 months.

– Rules for investors

Investors claiming EIS tax relief must satisfy conditions including the following:

• Shares must be ordinary with no preferred rights and held for at least three years.
• The shareholding should be lower than 30% either alone or when aggregated with associates. This is measured either by share capital, share capital and loan capital combined or voting rights.
• The investor must not be employed by the issuing company, subject to an exception for certain paid directors or if certain conditions for MBO apply.

EIS relief for management buyouts (MBOs)

Following a recent decision by the First Tier Tribunal, tax relief may now be available in certain MBO (management buyout) situations. Historically relief was denied in MBOs because the investing individuals (usually managers or directors of the old company) were deemed connected with the new company making the investment. In addition to obtaining EIS relief on future MBOs, it may also be possible to get it on certain historical transactions.

EIS has always been valuable for attracting investment into smaller, entrepreneurial businesses. Now, at a time when traditional sources of funding remain difficult to access, it is highly sensible that the Government has chosen to make EIS more tax efficient for investors and it’s at just the right time to encourage the economic recovery.

Lesley Stalker is an EBA Expert – follow http://twitter.com/taxtalkrjp