EIS for angel investors – what UK startups need to know

In the UK angel investment may lag significantly behind the US, but it’s not for lack of incentives. If you’re raising money in the UK from angels, you need to know about the Enterprise Investment Scheme (EIS), and make sure your startup qualifies.

EIS is a very attractive HMRC tax incentive scheme that provides three great benefits for angel investors:

• An upfront bonus in the year of the investment of 30% relief against income tax. So, for example, your angel can invest £100,000, but in return he’ll get a £30,000 discount on his next tax return. So he’s only out of pocket for £70,000!
• Partial protection of financial losses: investments that fail get a further relief against income tax. A 50% tax payer would only lose £35,000 on a failed £100,000 investment.
• Successful exits are tax-free: gains are exempt from Capital Gains Tax, which currently saves 18%.

So for these three reasons most UK angels really care about making EIS approved investments. For your investors to get EIS relief there are some qualifications, here are the most important ones:

• Your investors make an equity investment (not a convertible loan)
• Your investors get common shares (not preferential)
• Your company has less than 50 staff and assets of less than £7M
• Your company is raising less than £2M
• Your company must be a UK limited company

To make things easy, you can apply now for EIS Advance Approval with HMRC, and I really recommend you do so as it makes your startup more attractive than one without advance approval, (and loads more attractive than an investment which doesn’t qualify). As it takes a few weeks to get the approval, do it before you start talking to investors.

What you need to do to get EIS Advance Approval for your startup:

It’s actually very simple – you don’t need to pay an accountant or anyone else to do this for you – I sent a one page letter, and some  of the following info to HMRC:

• Company accounts (management accounts are sufficient)
• Business plan
• Memorandum and Articles of Association
• Any agreements between you and potential shareholders

Within a short time I had a phone call from them asking me one quick question, and then shortly after that a letter confirming that my company, Teamly Ltd, was given advance approval.Read more about EIS on the HMRC website, and download the Advance Approval form here.

Please note I’m neither a lawyer or an accountant, so you should read the HMRC advice yourself but the main point I want to make is you can take the initial step yourself; don’t pay anyone to do it for you.