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Funding your business through EIS and crowdfunding

27th September 2017 Print

In this article, crowd investment specialist Current Capital underlines the funding opportunities offered by the Enterprise Investment Scheme (EIS) and crowdfunding.

What is the Enterprise Investment Scheme?

Set-up by the government, the EIS has been established to help companies attract investments from qualifying investors.

The scheme is particularly beneficial for smaller trading companies with a greater risk, as investors can take advantage of a range of tax reliefs. It offers benefits like:

- A deferral of EIS Capital Gains Tax for the life of the investment on the amount subscribed.

- 30 per cent EIS income tax relief on the amount subscribed, which can be up to a maximum investment of £1 million in the 2017/18 tax year and/or £1 million which is carried back to the 2016/17 tax year for a minimum of three years.

- 100 per cent inheritance tax relief after two years, so long as the investment is held at the time of death.

A £100,000 investment from a UK tax payer would receive a £30,000 tax rebate from HMRC. This assumes that the investment is in a qualifying company and the individual’s income tax liability has exceeded £30,000 in the previous tax year.

Visit the GOV.UK site or click here for a complete breakdown of the various tax reliefs available, how it can be claimed and how a company can qualify for the EIS.

What is crowdfunding?

Finding out about investment opportunities used to mean relying on accountants, financial advisors and word of mouth. It used to be a long-winded process comprising of several stages from self-certification through to signing an investment memorandum before performing their own due diligence and negotiating the terms of their investment. 

The process was slow and often resulted in additional costs for investors, who had to arrange their own due diligence and cover any associated fees. Fortunately, crowdfunding has made the entire process much more efficient.

Crowdfunding has changed this. It is a method that businesses can use to raise money, awareness and support for a project. It allows companies — especially small businesses that had previously been turned down by High Street banks — to appeal directly to small investors (including members of the public) by trying to raise money for an idea in return for a share in the business. 

Crowdfunding benefits include:

1. You receive advocates who will support both a business and the idea, becoming part of the journey and making for appealing ambassadors when the project develops in the future.

2. Additional funding can be unlocked, such as grants, if a charity or community group or investors, loans or a pre-cursor to an equity crowdfunding campaign of a business.

3. While creating and launching a project via a crowdfunding platform, those with the idea will need to think about how best to market the idea — developing their marketing skills in the process.

4. Validation is received by the fact that small investors and members of the public are on board with an idea and are already paying or contributing in order to bring it to market.