The Enterprise Investment Scheme (EIS) is one of four venture capital schemes designed to allow certain types of small, higher-risk, unquoted trading companies to raise capital, writes our Head of Tax Cormac Marum.
The schemes offer significant tax reliefs to individual investors buying new shares in the company. Availability of relief under the EIS was centre stage in a recent case at the tax tribunal brought by Inferno Films Ltd.
Inferno, a film production company based in Wales, needed funding to make a psychological thriller The Ballad of Billy McCrae. Spoiler alert: Inferno won.
In essence, the EIS offers several forms of relief. Chargeable gains on any asset can be deferred by making a qualifying share subscription. The investment itself can attract income tax relief and a capital gains tax exemption on gains made when the shares are disposed of.
Income tax relief is particularly generous, at 30% on investments up to £1 million a year, and £2m a year, if at least £1m of that is invested in knowledge-intensive companies.
A company must meet stringent conditions for relief to be available to an investor. For example, the investment must generally be made within seven years of the company’s first commercial sale, and the amount of capital raised in any 12-month period is limited to £5m (£10m for knowledge-intensive companies).
For Inferno, the condition under the spotlight was the risk to capital condition. This requires the company to use the money for growth and development, and stipulates that the investment should entail the risk of the investor losing more capital than they are likely to gain as a net return.
HMRC argued that Inferno failed here because it did not have “objectives to grow and develop its trade in the long term”. Specifically, it highlighted Inferno’s lack of employees and the fact that it subcontracted many of its activities.
It suggested Inferno was at best, a vehicle to provide finance for a series of individual projects. Inferno said its approach conformed to film industry norms and was the only realistic course of action for a small start-up venture. Its argument was upheld by the tribunal, which found that sufficient long-term aims did exist, as evidenced by its commitment to the Welsh film industry.
Whether you are an investor or a company looking for inward investment, we should be pleased to explain the venture capital schemes in more detail.
I always get quick, clear and definitive responses from the Harwood Hutton tax team – commercial answers to commercial issues.Robin Berry – Morgan Management
Right from the outset Harwood Hutton gave us direction and great advice – and that advice has evolved over the years as we’ve grown. We’re both medium-sized companies providing a bespoke service – one furniture, one accountancy – and the relationship works.Andy McCarron, McCarron and Co
I’m deeply impressed with Harwood Hutton’s extensive knowledge of tax arrangements for residential and commercial property landlords.Qadeer Ahmed, MD, ABA Finance
They really took their time to understand what was important to us and our business and the expertise we required. Whoever we speak to at HH, we get the same fantastic response and technical input. It’s a real partnership.Edward Finch, group MD, MRIB insurance brokers
I have worked with the directors at Harwood Hutton on a number of mutual client matters over many years. The reassurance of their clear, commercial and focussed advice is one of the main reasons I regard this as one of my most valuable professional relationships.Frank Wessely, Partner, Quantuma LLP
Harwood Hutton never seem to rest on their laurels. They are always seeking out new avenues and ways to improve their offering. A very forward-thinking company with staff who are always well briefed and who approach each task with drive.Karl Austen, MD, Surefoot Communications
We have engaged Harwood Hutton in several areas of structuring, including VAT issues, decoupling an SPV from a group structure and HMRC clearance for a transaction. The team have exceeded all expectations by being proactive, measured and very thorough.Adam Fawsitt, Director, FHT Limited
We moved to Harwood Hutton as they delivered a succinct and professional proposal. If anything, we have been more impressed post-move. They are a fantastic company to work with. They do truly differentiate. They have the skills and capabilities of a mega firm but with a personal service.Edward Finch, group MD, MRIB insurance brokers
Join our mailing list to receive important news and insights for business leaders and private individuals