The Enterprise Investment Scheme (EIS) is a government initiative, introduced in 1994, created to encourage investment in small and medium sized companies which by their nature are generally considered high risk.

By investing in new shares in these companies, private investors can enjoy a range of tax reliefs, which are designed to help lower the overall risk profile of the investment.

Investments are either made directly into a pre-identified single company or into an EIS fund. Instead of being structured as a pooled investment, EIS funds commonly refer to a collection of investments in EIS qualifying companies, purchased on behalf of investors under the terms of a discretionary management contract. The investee companies will be chosen to fit the parameters of a common investment policy.

In order to qualify for EIS benefits, the company and the investor must meet certain criteria as defined by HMRC, including that that the shares must be unquoted at the time they are issued. This means that the company’s shares cannot be listed on the Main Market of the London Stock Exchange or any other “recognised” stock exchange.

After a minimum three-year holding period, the company can subsequently become quoted without the investors losing relief (subject to there having been no arrangements for it to become quoted when the shares were issued).

For the purposes of the EIS rules, the Alternative Investment Market (AIM) and the Aquis Exchange are not considered to be “recognised” exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all the other conditions.

In order to maintain the tax benefits available under EIS, an investor must hold their shares for three years from the date of issue (or, if later, three years after the start of the qualifying trade) and the company must continue to meet the qualifying conditions throughout this period. Failure to do so, could result in a withdrawal of the tax reliefs.

Being an equity investment, investors should be aware that returns are not guaranteed, and the original amounts invested could be lost in part or in their entirety. Given that small companies can take time to grow, and an exit may not be immediately apparent for shareholders, EIS investments should be considered high risk, long-term investments, being at least three to five years, if not longer. Furthermore, the availability of tax benefits should not distract investors from the need to properly consider the risks versus potential returns of any given opportunity. As with any alternative investment, tax should not be the driving reason behind an individual’s reason decision to invest. Tax treatment is dependent on the circumstances of each individual and may be subject to change in the future.