The Enterprise Investment Scheme: a longstanding support for growing businesses
The Enterprise Investment Scheme (EIS) has existed since 1994, replacing an earlier similarly targeted business expansion scheme. The generosity of the scheme makes it a form of state aid. When the UK was part of the EU, the scheme always had a finite life cycle with a so called ‘sunset clause’, whereby the scheme would end on a certain date if no action was taken to extend it.
The sunset clause was due to take effect in April 2025, but earlier this year the Government announced a ten year extension of the scheme to 2035.
Extension brings relief to growing businesses
The extension of the EIS is great news for younger businesses looking to fund growth through external investment.
The retention of the ‘knowledge intensive companies’ regime also means the scheme remains open to slightly older or larger businesses, provided those businesses are suitably focussed on R&D or innovation in their marketplace.
HMRC’s warning: EIS abuse cases
While the scheme remains generous, HMRC has become increasingly vigilant in cases where they believe the relief is being abused. A number of these have shown up in Tribunal over recent years.
The first were a string of special purpose vehicles established by animation houses to produce animated TV/online video programmes on a one-company, one-show basis.
HMRC had a fair bit of success challenging these with particular reference to the ‘risk to capital’ condition and the requirement for an intention to develop the trade in the long term.
Next came a case involving some investors who had kept a failed EIS venture on life support with a view to preserving the CGT exempt status of the company shares. Over a decade or more they re-invented the company on several occasions to pursue other ventures before taking £20m out of the company as what they believed would be a tax free gain, doing so in fear of the relief being withdrawn following a general election.
Having hoped to have avoided CGT on the withdrawal, we imagine the investors were most upset at being handed an income tax charge under the transactions in securities legislation instead. Their decade long nursing of the company not only didn’t make their tax position better, it made it significantly worse.
Recent cases: Putney Power and Piston Heating Services
More recently, HMRC challenges Putney Power and Piston Heating Services. Like the film animation companies mentioned above, these were special purpose vehicles set up by a larger established company to carry out individual projects. HMRC took a different tack in these cases and overturned relief by convincing the First Tier Tribunal that the way in which the companies were run, including the involvement of the more established ‘founder’ company, meant the companies had not commenced trading within two years of the issue of shares and so were ineligible for EIS status.
EIS is valuable but requires caution
The conclusions to be drawn are that EIS continues to be an incredibly valuable relief for growth businesses and their would be investors. However, it s critical to ensure that the company issuing shares is eligible and fully compliant with HMRC’s rules. It is also important to know that HMRC will challenge cases where they consider relief is being pursued outside the spirit of the rules. When they do so, the legislation is both complex and open to interpretation, such that there are a variety of arguments HMRC could choose to pursue in order to deny relief.
The next step
If you are interested in whether your business could benefit from using this well established and valuable relief, please contact your usual UHY tax adviser.
