Enterprise Investment Schemes

not just for big business 

 

I wrote last time about my second favourite tax break in business, the Research and Development Tax Credit.  This week, I will write about my equal favourite. The Enterprise Investment Scheme (EIS) and its baby sister the Seed Enterprise Investment Scheme (SEIS). The SEIS maybe the younger sibling, but it is even prettier and potentially cleverer that its big brother, the EIS.  

The other tax break at the top of the table is boring old pension.  I know, entrepreneurs can find better ways of investing their money.  A car dealer can make more by spending the cash on cars than investing into pension.  Everyone wants to be a landlord and then you can have tenants paying for your pension.  But from a tax point of view, pension is about as good as it gets. Maybe a future article? 

EIS What is it? 

The world of investment has kind of hijacked the EIS. There are big funds out there investing in solar farms that are giants in the world of the EIS. This was not what this was built for.  Where the R&D Tax credit system encourages businesses to invest in themselves, the EIS stable aims to get other people investing in your business. 

There are subtleties and details I won’t bother you with in this article – at the end of the day for all of the articles I have read on the subject, the best content is still from HMRC. If you want details of allowable trades or what you can spend the cash on, go to HMRC. I am just going to try and get you interested enough to go to the HMRC site. 

In every room of busy successful business people that I talk to, people like yourself no doubt, the thing that gets the most interest is the humble EIS.  I can drone on for hours about preparing businesses for sale, succession planning, business continuity or whatever but start talking about EIS and people’s ears prick up.  Not that I do drone, obviously, I’m mesmerising on stage! 

Now, why bother? 

If you need money for a project, then you can/might be able to borrow. As a minimum the lender will probably want a charge against your house. Also, no matter how many attractive interest rates you see on line, the number I keep hearing is 9%.  As in, the interest rate will be 9%. 

The EIS is an attractive alternative for a number of reasons, some tax driven and some good old-fashioned business.  The way it works is if someone who isn’t your family invests in your business, they get between 30%-50% of their cash back from the government.  That is so long as they have paid at least that amount in tax.  I have listed what I think the reasons are below. 

If your exciting new project makes them a million – no Capital Gains Tax. 

Now, everything I write comes with terms and conditions attached.  I promise to try and keep my detail and jargon to an absolute minimum but before you do (or don’t do) anything as a result of this article click on the link below (actually read it) and then get professional advice: 

https://www.gov.uk/guidance/venture-capital-schemes-apply-for-the-enterprise-investment-scheme 

Reason one – The List 

Here is the thing, funding tends to come in rounds. If you think you need 100k to develop a product, you will probably need more. If you think that the development phase is the most expensive, you will probably need even more for beta testing or marketing or whatever. 

The point is you might be able to fund this out of cash flow, but you might need to raise more money.  Back to the seed funding grindstone.  Unless you have a list of interested and engaged investors who have backed you before and now like your work. 

A list of investors can be worth its weight in gold. 

Find it, nurture it, talk to it and watch it grow. 

Reason two – Tax Arbitrage 

So, an EIS gives away shares in your business in return for cash. You would rather pay the interest, that’s fine, I get that.  You’ve worked hard in your business, why should you give it away? 

Here’s why. 

Let’s say you qualify as an SEIS, half of the money is coming from the government. So, in my experience, the price sensitivity of an investor is lowered. In other words, you get to give less of your company away for a given amount of cash. 

You can’t agree this bit up front, but if in five years’ time your new widget is doing OK but it hasn’t set the world on fire then you could buy those shares back at the price your investor paid.  They still make 50% from the tax, that’s a great return for a risk mitigated investment. That’s called tax Arbitrage. 

Now at this stage if you are an investor and looking for advice, this isn’t intended as tax or investment advice.  All I am saying here is aimed at the small business not at the investors. Giving you a space hopper and asking you jump off a cliff might be a little less risky than doing it without the space hopper, but not enough to make jumping clever! 

Reason three – Risk Mitigation 

People are going to choose to invest in your business because they like you and what you are doing.    This will happen only after they decide that you can make them money.  Even if your investor loves you like a brother, lose them money and this might change.  

In behavioural economics there is a principal that sates that people hate losing money three times more than they enjoy making it.  The same is true here.  Anything that reduces investment risk is a very good thing. 

I have already mentioned that your lovely investor gets 30-50% of their cash back from the tax man when investing into a qualifying EIS.  It gets better.  If you lose the lot then the investor can normally offset this against income tax in the year of the loss.  If they are a 45% taxpayer that means that they should lose a maximum of 28%-38% of their money. 

There are other reasons, some big and some small why this make sense.  My intention it to do a follow up article if you want it. Let me know. 

Contractor Unlimited 

Contractor unlimited are Independent Certified Practising Accountants based in Warrington and have been specialists in contractor accounting since 2011. We have an established reputation for providing a professional and friendly accountancy service across the North West of England. Contact us today with any enquiries about the services we provide, we will be happy to hear from you. 

Email : enquiries@contractorunlimited.co.uk 

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