EIS – Practical considerations when investing

Gordon Pugh



When potential investors hear about the tax reliefs available through Enterprise Investment Schemes (EIS), they tend to get a little carried away and excited by the prospect. However, there are some very important considerations to bear in mind, outside of the normal risk and investment strategy mandates, to manage the expectations of the potential investor.

ADVANCE ASSURANCE

Any company that is seeking EIS status must fulfil certain criteria, as laid out by HMRC. One of these criteria is that a company must be undertaking its qualifying trading activities for at least four months. Realising that this could be an issue for investors who are keen to invest in a new or young company, HMRC allows companies to apply for “Advance Assurance” ahead of fundraising. This process has become much more in-depth and stringent over the last 12 months resulting in the requirement for an EIS company to demonstrate their potential for growth and development. However, although this may be arduous for the company, it is very beneficial to the potential investor as they can be assured that if the company continues in the trading activity that it has submitted to HMRC, after four months of trading, it will gain EIS status. Therefore, it is important to ascertain whether a company already has its EIS status or whether it is a new company seeking EIS status. If it is the latter, there are a few further considerations for investors which revolve around the timing of certificates.

OBTAINING EIS STATUS

For companies that have already gained EIS status, it is (usually) a straight forward process for them to obtain EIS certificates from HMRC for their new investors and typically takes between four to nine weeks once they have submitted the forms to HMRC. For new companies, they often wait until they have finished fundraising before they start their trading activity. This could be because they need to raise a certain amount of capital before being able to undertake their trading activity. There may also be some delay between finishing fundraising and the start of their trading activity. These companies must then wait at least four months before sending their EIS forms to HMRC. If the investee company has already obtained Advance Assurance from HMRC, the turnaround time should again be expected to be four to nine weeks. However, if the company does not have Advance Assurance, this time with HMRC could be a lot longer.

So, for new companies, it may be the case that your investor made their investment in December 2016; the fundraising may have closed in April 2017; and then trading may begin in June 2017. These companies would then have to wait until October 2017 before being able to apply for their clients’ EIS certificates, which could then arrive at the end of December 2017 – a year from the initial investment.

This is a very standard timeframe for EIS companies and one that should be explained to investors so that they can plan for paying their tax and claiming it back at a later date.

CLAIMING EIS RELIEF

Once the investee company has obtained its EIS status, it will be issued with certificates to fill out for its investors. These certificates are called EIS3 Certificates and are partly completed by the Company Secretary or one of its Directors. Attached to the EIS3 Certificate is a form that can be filled out in order to claim Income Tax Relief and/or defer a Capital Gain. These are relatively self-explanatory and can be sent off ahead of completing a tax return (if the investor is required to complete a tax return). Copies of the forms should be kept as well as the EIS3 Certificate, in case HMRC wish to see them.

If you would like to find out further information about the range of Evolve EIS Portfolios, please contact:

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