Enterprise Investment Scheme
If you need a detailed introduction to the Enterprise Investment Scheme then the Inland Revenue booklet is an excellent guide to the topic. The information in this page is designed to help you consider whether it is suitable for you.

Outline of the relief - a simplified version

• You subscribe for new qualifying shares in a qualifying company
• Put simply the shares must be ordinary shares without "special" rights
• The company must carry on a trade which is not in the list of precluded trades, for three years
• The company must spend the money raised within a year of beginning to trade for the purposes of its trade and must be trading within a year of the investment

What are the tax benefits?

1. The main benefit is that you get capital gains tax on the disposal within previous three years or next 12 months. So if you were to invest £100,000 you avoid tax of £40,000
2. The company formed will be a small company and is only taxed at 10% on the first £10,000 profit, 20% thereafter up to £300,000
3. The shares will currently qualify for business property relief and so there is no inheritance tax liability on the amount invested.
4. The shares are business assets so qualify for higher CGT tapering relief 75% not 40% max
5. If your investment is less than 30% of equity then you could qualify for 20% income tax relief as well. Obviously you lose the level of control you would have if you own your own company.
6. If you qualify for the Income Tax Relief then any increase in value over the original investment will be exempt from CGT.

Ways in which EIS could suit your circumstances

1. The intention of the scheme is that you will invest in a company that is going to carry on a successful business; one which needs capital and will grow, employ people and create wealth. This involves a commercial risk but provides you with the opportunities for reward if successful.
2. If you are thinking of setting up a consultancy company then the scheme provides a good way to allow you to buy a business property, and get tax relief on the cost. This might allow you to afford a building which might be beyond your price range. If you have £200,000 proceeds and your building will cost £190,000 then if you pay £80,000 CGT there would not be enough left
3. If you have an expensive hobby, which you could commercialise, then it allows you support the hobby without paying tax. Provided that the activity is a trade carried on with a view to profit there is no requirement that the profit is a good rate of return for the money invested. If you dream of a steam engine museum, which will cost £500,000 to set up and make £10,000 per annum profit, then you probably could do this under EIS.
4. If you want to set up an investment company. This requires you to think more laterally. You need to set up a venture that qualifies within the rules with the expectation that after an appropriate time you will concentrate on the investment side and wind down the trading activity.
5. You might extend this idea in 4 by engaging someone as an employee or contractor to carry on the trade for you. You could set it up so that after a period they had the option to buy the business from you as a going concern. It might also be possible to sub-contract the management and they would find employees to run businesses. We can offer this service.
6. If you want to fund a major capital purchase e.g. a holiday home or yacht then as in 5 you could carry on the trade to qualify for relief and the company would then buy the asset. The Inland Revenue is contributing 40% of the purchase price. To do this will not be easy but approached with the right spirit might be possible.

EIS is a useful way of adding a tax efficient high risk element to an invest portfolio or alternatively a tax efficient low risk element using a property.

Important Caveats

1. If you sell the shares in the limited company then the capital gain will come back into charge in the year you sell the shares.
2. If you fail to spend the money within 12 months of trading then a capital gain will come back into charge equal to the money not spent- even though the money will still be in the company.
3. If you emigrate within 5 years then the capital gains comes back when you leave.
4. Relief is denied if the main purpose of making the investment is to avoid tax.
5. Letting property is not a trade
6. There are lots of anti-avoidance rules - in particular on extracting value and guaranteed exits - you need proper advice
   

Can we be sure it will work?
If you send the Inland Revenue a business plan they will give a written ruling that the investment as proposed in the plan will qualify for relief. The clearance is invalid if you mislead the Revenue or you significantly change the business from the one in the plan.

The clearance will not protect you if the business does not continue the trade for the full three years and also if the money is not spent.

Can you give examples of cases where you have advised?
We have set up many companies for our own regular clients. Plus we advise a number of local accountants and have advised them setting up schemes for their clients. These include

1. Setting up a retail shop including buying premises and stock
2. Management consultancy which bought a share in an office building
3. Music promotion company.
4. Commercial Art Gallery

Excluded Trades
The following are all excluded from relief

1. dealing in land, in commodities or futures, or in shares, securities or other financial instruments;
2. dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution
3. banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
4. leasing (including letting ships on charter or other assets on hire) or receiving royalties or licence fees ;
5. providing legal or accountancy services:
6. providing services or facilities for a trade carried on by another person, where-
   1. that trade consists, to a substantial extent, in activities within any of paragraphs (a) to (e) above; and
      
   2. the same person holds (or is deemed to hold) a controlling interest both in that trade and in the trade carried on by the company which provides the services or facilities
7. property development;
8. farming.
9. hotels
10. Nursing Homes

Wholesale and retail distribution
For the purposes of the definition of a qualifying trade dealing in goods is an unacceptable activity unless it is in the course of an ordinary trade of wholesale or retail distribution. Wholesale and retail distribution are defined for this purpose as follows-

1. a trade of wholesale distribution is one in which goods are offered for sale and sold to persons for resale by them, or for processing and resale by them, to members of the general public, for their use or consumption;
2. a trade of retail distribution is one in which goods are offered for sale and sold to members of the general public, for their use or consumption.
   

The rules for determining whether a trade of wholesale or retail distribution is ordinary are discussed below.
A trade is not an ordinary trade of wholesale or retail distribution if goods dealt in are held for an extended period and the trade consists to a substantial extent-

1. in dealing in goods of a kind which are collected or held as an investment; or
2. of an activity within (a) above, together with any of the excluded trades listed above.

Goods dealt in are held for an extended period for this purpose if a substantial proportion of them are held by the company for a period which is significantly longer than the period for which a vendor would reasonably be expected to hold them while endeavouring to dispose of them at their market value.

The considerations below apply where a situation does not come within the exclusion just dealt with, but presumably they also apply where there is doubt as to whether a situation comes within that exclusion.

Subject to that exclusion, the following features are to be regarded as indications that the trade carried on by a person is an ordinary trade-

1. the goods are bought by the person concerned in quantities larger than those in which he sells them;
2. the goods are bought and sold by the person concerned in different markets;
3. the person concerned employs staff, and incurs expenses in the trade, in addition to the cost of the goods and (in the case of a trade carried on by a company) in addition to any remuneration paid to a person connected with the company.

On the other hand, the following features are to be regarded as indications that the trade carried on by a person is not an ordinary trade-

1. there are purchases or sales from or to persons who are connected with the person carrying on the trade;
2. purchases are matched with forward sales, or vice versa;
3. the goods are held by the person concerned for longer than is normal for goods of the kind in question;
4. the trade is carried on otherwise than at a place or places commonly used for wholesale or retail trade;
5. the person concerned does not take physical possession of the goods.

To find out more about the Enterprise Investment Scheme , please call us at +44 (0)1223 507080 or email at info@tax.uk.com