EIS Qualifying Company – Criteria, Rules & Conditions

EIS Rules

Overview – EIS Qualifying Company

In overview, the investee Company must satisfy the following requirements:

• Qualifying trading company (or parent of a trading group)
• Unquotedat time of issue
• Satisfy a gross assets / employee test
• Not in financial difficulty
• Not controlled by another company
• Has no non-qualifying subsidiaries
• Have UK permanent establishment

Qualifying Trading Company

The first point is that the company must conduct a qualifying trade. The test is that it must conduct an activity that actually is, or is treated for all purposes of the Taxes Acts as, a trade.

This means, for instance, that Furnished Holiday Lettings, which are treated as a trade for some of the Taxes Acts, are not included as a trade for EIS purposes.

The trade itself does not have to be carried out wholly / mainly in the UK. However, the investee company needs to have a UK Permanent Establishment.

Other than that, all trades qualify except ‘excluded activities’ which are set out in a list form in the statute.

These are as follows:

Excluded activities
Dealing in land, commodities, futures in shares, securities or other financial instruments	Dealing in goods otherwise than in ordinary course of trade	Banking, insurance, money-lending, debt factoring, hire purchase financing or other financial activities
Leasing	Receiving royalties or licence fees (except in the case of the exploitation of an intangible asset created by the co or group)	Providing legal or accountancy services
Property development	Farming / market gardening	Holding, managing or occupying woodlands, any other forestry activities or timber production
Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment	All energy generation activities

Unquoted at Time of Issue

As stated above, the investee company must not be quoted when the shares are issued. For this purpose, AIM is treated as unquoted.

In addition, it is a requirement that there are no arrangements in place for any listing of the Company at the time of issue or for the investee company to become a subsidiary of a listed company.

It should be noted that if the company subsequently becomes listed then this will not prejudice the investors’ EIS relief.

Gross Assets / Employee Test

EIS is available for smaller, growth companies. It is fitting then that the Company must pass a gross assets test.

This means that the gross assets of the business cannot exceed:

• £15m prior to issue;
• £16m immediately after issue

Further, the Company must employ less than 250 full-time employees at issue.

Administration / Liquidation

How is the status of the company affected by entering administration or appointing a liquidator?

From 21 March 2000, any failure to satisfy a requirement which is due entirely to the company’s having been put into administration / receivership is to be ignored assuming that this was done for normal commercial reasons.

if the company is dissolved without winding up, the company will fail to satisfy the required conditions. However, again, any such failure will be disregarded if it is done for genuine commercial reasons

Control & Independence Requirement

Control

The company must not, at any time in Period B control any company which is not a “qualifying subsidiary” of the issuing company.

There must be no arrangements at any time during Period B by virtue of which this test could be breached

A ‘Qualifying subsidiary’ is one in which the investee company directly or indirectly holds more than 50% of the ordinary share capital.

In other words, no other person other than the company issuing the shares, or one of its subsidiaries, must control the subsidiary.

“Control” is defined as per ITA 2007, s995.

Independence Test

Further, and the other side of the coin, is that the investee company must not be under the control of another company in the relevant period.

It is also specifically provided that the company must not be a 51% subsidiary of another company.

There must not be any arrangements in place during Period B for this test to be breached.

Again, this can cause difficulties when commercial life throws up opportunities (and perhaps attention to EIS is not at the forefront of everyone’s minds).

This can be seen in the case of Gregory Finn, Averil Finn, Andrew Cornish and Robin Morris [2015]. Here a group of EIS investors lost their relief when their company was acquired by another company in a takeover.

Their company (PhotonStar LED Limited) – which had raised capital under the EIS scheme – became the 51% subsidiary of another company, Enfis Limited (which had also raised EIS funds).

However, the takeover happened within the relevant three year period following the issue of Photonstar’s EIS shares. As such, the EIS relief was withdrawn as the company no longer satisfied the independence test.

If you have any queries about the requirements to be an EIS Qualifying Company or EIS in general, whether as a potential investee company or investor, then please do get in touch.

Albeit, we can’t give you investment advice as we are not regulated by the Financial Conduct Authority – so please get that type of advice from someone who is!