With more relaxed rules on the horizon, there has never been a better time to consider funding new ventures via the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS), schemes that seek to encourage investment in small or start up ventures by offering generous tax reliefs to the investors.

The Enterprise Investment Scheme was introduced in 1994 and enabled subscribers of ordinary shares in ‘qualifying’ companies to benefit from tax reliefs. These include reductions of up to 30% on income tax liability as well as CGT exemptions and deferrals upon disposal of the investments. Initially, an annual investment limit of £500,000 per investor was set.

However, from 6 April 2012, the annual investment limit is set to increase to £1 million per investor. This will be coupled with a significant relaxation of the current £2 million ‘share issue limit’ within each company that will benefit from EIS relief. From 6 April 2012 this limit will be increased to 10 million in every 12 month period. It is hoped that these changes will attract a wider range of investors to smaller perhaps higher-risk companies, thus helping them to flourish.

Castle Rock Brewery, the Nottingham-based brewer and pub operator used this approach to raising cash last May, securing a site for its latest pub after raising £600,000 via an Enterprise Investment Scheme (EIS). Chairman Chris Holmes commented at the time that “If we can make a success of this then we will certainly be looking at duplicating

[the EIS project] in the future.”

Key qualifying points for an EIS
Any pub or restaurant operators interested in using EIS to raise capital should first familiarise themselves with the complex rules that must be satisfied. Specialist advice should be sought to fully assess company suitability but some key points to note are as follows:

  • must be a ‘small company’ – from April 2012 companies will be deemed ‘small’ if they employ less than 250 full-time employees (currently 50) and their Gross Assets do not exceed £15 million (currently £7 million)
  • must carry out a ‘qualifying trade’ – most trades qualify but you must ensure that the company does not carry out more than 20% of so-called ‘excluded activities’ (for example, property development and dealings in land or securities)
  • must not be controlled by another company (i.e. 51% or more)

In addition, the government is considering introducing a Seed Enterprise Investment Scheme which will be specifically targeted at business angels investing in start-up ‘seed’ companies. These investors can expect up to 40% income tax relief together with a CGT exemption on disposal. Draft legislation to be included in the Finance Bill 2012 was released on 1 February and further developments are expected shortly.

The schemes should appeal to those planning investments within the hospitality sector, particularly where substantial capital is required. There have already been a number of successful EIS investments in the sector.  City Pub Company (East) and City Pub Company (West), both of which were formed and funded using an EIS, scheme attracted a lot of publicity late last year. According to press reports the entrepreneurs involved in this new had previously funded The Capital Pub Company under an earlier EIS scheme which was sold on to Greene King for £93 million, proving that utilising EIS schemes can be a hugely profitable.

If you are interested in finding out more about EIS or SEIS, please contact Kimbells Freeth for further information or for a consultation with one of our EIS specialists.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.