How to claim your EIS tax reliefs: income tax
Introduced as the successor to the Business Expansion Scheme in 1994, the Enterprise Investment Scheme was the first of a series of venture capital schemes launched in the UK with the goal of encouraging investment into unlisted early-stage businesses.
While the scheme has undergone a number of changes over the years, this primary goal has remained the same, and has proven resoundingly successful. Since its introduction, the EIS has attracted more than £24 billion of investment into over 33,000 startups and scaleups.
A significant proportion of the scheme's success over the course of the last three decades can be attributed to the range of generous EIS tax reliefs the scheme offers investors, and the considerable risk minimising benefits they boast.
Arguably the most renowned of these advantages is the 30% income tax relief the EIS allows on the value of an investment, but before we look into how exactly this can be claimed, it can be of use to observe a brief overview of how this relief works.
An overview of income tax relief
Income tax relief is the headline relief offered by the Enterprise Investment Scheme. Allowing an investor to claim 30% of their initial investment amount back in the form of a deduction from their personal income tax liabilities, this relief alone would allow an investor to claim back £15,000 from an initial £50,000 investment, single-handedly reducing its downside risk by almost a third.
This relief can either be claimed in the year the investment takes place or instead can be treated as if the investment took place a year earlier, carrying the relief back to deduct from the previous year's tax liabilities. Of course, this is provided that sufficient tax is paid in the year claimed against to cover the amount claimed.
A step-by-step guide of how to claim the tax relief
Professional advice should always be sought when looking at any financial process, including the claiming of tax reliefs. However, the process is able to be carried out by yourself, and the below gives an overview of how it can happen.
The way that income tax relief is claimed will vary depending on individual circumstances, including which year the relief is being claimed from and how you are wishing to claim your relief.
However, to claim any relief, you must first be issued an EIS3 form by the company issuing the shares (which they will obtain from HMRC and complete the details of the investment on the first page). HMRC may request to see your EIS3 certificate for any claim made.
For investors who normally submit a self-assessment tax return, tax relief is claimed by including the details as part of the tax return submitted to HMRC at the end of the year. As a result, there is no need to complete pages 3 and 4 of the certificate.
- In the “Other tax reliefs” section of the Additional Information form on page 2, the amount that has been subscribed for under EIS is entered in box 2.
- Please note, the amount entered is the amount subscribed, not the amount of relief, which will be calculated for you unless specified below. The maximum is £1 million.
- If you have already received some relief during the year by a change in PAYE code or reduction in payment on account, include this amount. However, if an amount is being claimed from the previous year, the amount is excluded.
- Additional details for each investment should then be provided in the “any other information” box - box 21 - on page 4 of the Additional Information form, or box 19 on page 7 of the tax return, and should include:
- The name of the company invested into
- The amount on which you are claiming relief for this year
- The date of issue of the shares
- The name of the HMRC office issuing the certificate and their reference
- How you wish relief to be attributed due to investing over £1m
- All investments should be listed, where some relief is claimed, even if the total amount is not being claimed
If you wish to carry back tax relief on shares that have already been issued this current tax year, and you have an EIS3 form, you can include this on your tax return for the previous year and state that this is carried back in the additional details. Likewise, an amended tax return can be filed for the previous tax year, with the carried back amount included, provided you are within the time allowed for amendments.
If you have been issued an EIS3 certificate for shares issued in the previous tax year and have already filed a tax return, you can complete the form on page 3 of the certificate ticking “Tax Relief for a previous year”, tear off this page and send it to HMRC, who will process this claim, and which may result in a rebate. This also applies for a claim that is made against the tax year prior to this last year's, where the shares were issued in the tax year 2020/2021 and you wish to carry back.
If you are paid through PAYE or do not normally complete a tax return, you are able to claim tax relief through an adjustment of your PAYE tax code for the year. To do this, you need to complete the third and fourth pages of the EIS3 certificate, ticking “Tax Relief in PAYE coding”, and return this to your HMRC tax office, who will amend your tax code for the year. You will then need to make the claim on your tax return if it is received from HMRC at the end of the tax year.
Useful information to know when claiming your income tax relief
There are a few useful deadlines for the above that should be considered as part of your claim. The claim for income tax relief must be made within 5 years of the 31st January after the tax year in which the shares are issued. For example, if you are issued shares in the tax year 6th April 2022-5th April 2023, then you have until 31st January 2029 to claim your relief.
As already mentioned, you cannot claim relief until the company sends you an EIS3 certificate, which it cannot do until it has been trading for at least 4 months. Therefore it can take a few months for the application to be completed and the certificates issued. This certificate will contain all of the information related to the investment that is required, including the issuing HMRC office and their reference.
This certificate must be kept safe, as HMRC may request that the original be sent in as evidence for the claim. As they are only issued as hard copies, another form must be requested if lost, which again can take a few months.
Making an investment into EIS-eligible opportunities
Just one of the tax benefits of investing in EIS investment opportunities, the Enterprise Investment Scheme boasts a range of additional reliefs that range from capital gains tax exemption to inheritance tax relief. But tax advantages aren't the only reason for the EIS's rising popularity.
Providing the opportunity for private investors to fuel the next generation of transformational UK-based startups, the EIS offers experienced investors a segue into incorporating positive impact investments into their portfolio, whilst simultaneously benefitting from the mutual growth (of which we've seen in recent years especially) early-stage companies are capable of generating.
It's important to remember that investing into opportunities such a stage is regarded as higher risk/higher return strategy, and whilst the EIS's library of tax reliefs do aid in minimising such risks, investors should always conduct ample due diligence on any portfolio company and investment provider before parting with their capital to give their investment the best chance of growth.