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.
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 £2 million a year, if at
least £1million 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 £5 million (£10 million for
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 that 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.