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A guide to
Enterprise Investment Scheme
(EIS)
– The Tax Reliefs Condensed
This is a basic guide prepared by the Technical Advisory Service for members and their clients. It is
an introduction only and should not be used as a definitive guide, since individual circumstances
may vary. Specific advice should be obtained, where necessary.
A LOOK AT THE TAX RELIEFS AVAILABLE UNDER THE EIS SCHEME
The Chancellor, George Osborne, has identified the Enterprise Investment Scheme as being an
important scheme for encouraging investment in small business. The scheme has been with us since
1994, having taken over from the business expansion scheme but, given the current landscape with
regard to obtaining business finance, the government are keen to promote the scheme as an
alternative means of promoting business finance.
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The rules and restrictions of the EIS Scheme are considered in our separate Guide to Enterprise
Investment Scheme – The Rules Condensed. The Office of Tax Simplification recently identified the
EIS scheme as being ‘four reliefs in one’; here we look at those reliefs.
1. Income Tax Relief
From 6 April 2012, the investor may up to £1,000,000 (combined maximum for Enterprise
Investment Scheme and Venture Capital Trust investment) in a tax year and obtain a tax reducer of
30% of the amount of investment. It is possible to carry back the amount paid to the previous tax
year. Any amount may be carried back, subject to the overriding maximum for the previous year not
being exceeded. Dividends received are not subject to income tax.
2. Capital Gains Tax Exemption
If the investor has received Income Tax relief (which has not subsequently been withdrawn) on the
cost of the shares, and the shares are disposed of after they have been held for at least three years
from the date of issue of the shares (or three years from the date of commencement of the
qualifying trade, if later), then any capital gain on the disposal of the EIS shares will be exempt from
capital gains tax.
3. Capital Gains Tax Deferral
Capital gains realised on the sale of any asset may be deferred against investments in an EIS
scheme; the gains crystallise when the EIS investment is disposed of.
4. Loss Relief
If the shares are disposed of at a loss, you can elect that the amount of the loss, less any Income
Tax relief given, can be set against income of the year in which they were disposed of, or any
income of the previous year, instead of being set off against any capital gains.
Let us look at some of these reliefs more closely by way of an example:
_____________________________________________________________________
Mr Yorke has taxable income, after allowances, for 2012/13 of £200,000. He makes an EIS
investment on 1 November 2012 of £100,000. Mr Yorke had previously made a capital gain on 14
October 2011 on a sculpture (after his annual capital gains tax exemption) of £100,000.
Mr Yorke has been told that he could significantly reduce his tax liabilities if he makes an investment
under the enterprise investment scheme and is considering an investment of £100,000.
Let us compare his tax position firstly on the assumption that he makes no EIS investment with the
position if he makes the £100,000 EIS investment:
Without EIS investment:
With £100,000 EIS Investment:
2011/12 Capital Gains Tax Position:
2011/12 Capital Gains Tax Position:
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£
Gain after annual exemption
100,000
£
Gain after annual exemption
Less: Gain rolled over
against
cost of EIS investment
Gain chargeable to CGT
CGT thereon @28%
(Mr Yorke has fully utilised his
basic rate tax band against
his income)
100,000
£28,000
2012/13 Income Tax
Position:
Taxable income
Income tax thereon:
34,370 x 20% =
115,630 x 40% =
50,000 x 50% =
Income tax liability
TOTAL OF 2011/12 CGT
AND 2012/13 INCOME TAX
LIABILITIES
100,000
-100,000
0
CGT thereon @28%
(Mr Yorke has fully utilised his
basic rate tax band against
his income)
£0
2012/13 Income Tax
Position:
200,000
6,874
46,252
25,000
78,126
£78,126
Taxable income
Income tax thereon:
34,370 x 20% =
115,630 x 40% =
50,000 x 50% =
200,000
6,874
46,252
25,000
78,126
Less:
Tax reducer (EIS
investment):
£100,000 x 30% =
-30,000
Income tax liability
£48,126
£106,126
£48,126
£58,000
Tax saving:
In the above scenario, Mr Yorke has achieved a tax saving equal to 58% of the cost of the
investment or, to put it another way, he has made a £100,000 investment at a cost of £42,000.
If the shares are held for the requisite three year period, any eventual capital gain on the sale of the
EIS shares themselves will be free from capital gains tax. It is important to note, however that the
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gain held over from 2011/12 is only “deferred” against the EIS shares and is not itself exempt. It
may be possible for Mr Yorke to sell the EIS shares piecemeal at a later date and realise the deferred
2011/12 in stages by making part disposals of the EIS holding, thereby utilising several years’
annual CGT exemptions in the process.
If we continue the above example further:
____________________________________________________________________
Let us assume that that in 2015/16, the EIS investment goes bad and the company is wound-up with
Mr Yorke receiving nothing for his shares. Mr Yorke’s taxable income, after any allowances but
before share loss relief, is £300,000 and he has made no other capital gains or losses during the
year. Let us compare the tax position both with and without a claim for relief for the losses on the
shares against income. (assume all rates and allowances remain the same as for 2011/12.)
2015/16 Income Tax Position
2015/16 Income Tax Position:
assuming EIS share loss relief
claimed:
assuming NO share loss relief claimed:
£
Taxable income
300,000
£
Taxable income
300,000
Less: Share loss relief:
Loss on EIS shares
100,000
Income tax relief
given 2011/12
-30,000
Chargeable to tax
300,000
Income tax
thereon*:
32,245 x 20% =
117,755 x 40% =
150,000 x 45% =
Income tax liability
6,449
47,102
67,500
121,051
£121,051
Chargeable to tax
Income tax thereon:
32,245 x 20% =
117,755 x 40% =
80,000 x 45% =
Income tax liability
-70,000
230,000
6,449
47,102
36,000
93,551
£89,551
Tax saving
2015/16
£31,500
Plus: Tax Savings from 2010/11 and 2011/12
£58,000
TOTAL TAX
SAVINGS
£89,500
(NB: 2013/14 Tax rates used in above example)
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Note: In the above scenario, the capital gain deferred from 2010/11 would crystallise but Mr Yorke
could “serial” defer the gain into a further EIS investment.
_____________________________________________________________________
It can therefore be seen that, even though the worst case scenario has happened in the above
example and the investment has become valueless, the tax savings achieved can be as high as
89.5% of the original cost of the investment. So, even though the enterprise investment is aimed at
encouraging investment in smaller, higher risk companies, the tax reliefs available can make them
look considerably less “risky” in the eyes of a potential investor.
Withdrawal of Relief
One of the biggest problems with EIS is that the tax reliefs will be withdrawn if, during the three year
qualifying period, either:

the investor or an associate becomes connected with the company

the company loses its qualifying status

any of the shares are disposed of (unless the disposal is to a spouse or civil partner - in those
circumstances the shares are treated as if the spouse or civil partner had subscribed for
them)

the investor (or an associate) 'receive value' from the company (or a person connected with
that company). Receiving value is broadly defined and includes receiving a loan or benefit
from the company, or receiving an asset from the company at below market value..
There is an obligation to inform your HMRC within 60 days of any of the events above occurring.
This is a guide for ACCA members to assist in understanding the Annual Accounting Scheme and to
provide assistance when dealing with clients or informing colleagues. This document has no
regulatory status and provides an overview of the scheme.
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ACCA LEGAL NOTICE
This is a basic guide prepared by the ACCA UK's Technical Advisory Service for members and their clients. It should not
be used as a definitive guide, since individual circumstances may vary. Specific advice should be obtained, where
necessary.
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