- 14th October 2018
- Posted by: Edward Kirkby
- Category: Enterprise Investment Scheme
In November 2015, HMRC introduced some changes to the Enterprise Investment Scheme rules (EIS).
A big change was the new ‘permitted maximum age requirement’, more commonly known as the 7-year rule. This states investment must be received within the company’s initial investing period, so within 7 years of the company’s first commercial sale (or 10 years for knowledge intensive companies).
Following this rule change, companies who have been trading for longer periods may no longer qualify for investment under EIS. Additionally, it’s important to note that if the trade is carried out by another person prior to being carried out by the company, this period of trade is included within the 7-year period.
Fortunately, there are two notable exceptions to this rule.
- If EIS investment is sought to allow the company to enter into either a new product or geographical market. To fully satisfy this exception, the investment under EIS must also be at least 50% of the company’s average turnover for the last 5 years. However, HMRC didn’t introduce this policy as a method for companies to get around the 7-year rule, so this exception will only apply where companies undertake a ‘significantly new business activity’. By this they mean an activity that is fundamentally different and requires disproportionately more investment compared to the company’s ‘normal’ activities.
So what is a new product market? This could be: a completely new product and sector, new customers, no track record, no test sales prior to EIS investment and no significant research and development spending. Alongside this, to qualify, HMRC state potential investors cannot entrust in a company’s current records to determine if their investment is likely to be successful, there must be a significant amount of risk.
- If you have previously received EIS funding within the newly defined 7-year initial investing period, a company can continue to raise under EIS indefinitely (up to the £12million limit).