1.1 The investment

All shares must be paid up in full, in cash, when they are issued.

Please note: One of the most common reasons for investments failing to qualify for relief under EIS is that shares are issued to investors without the company having received payment for them. This sometimes happens when a new company is registered at Companiesí House and shares are issued to members as part of the registration process, but the company then takes some time to set up a bank account and the shares are not paid for until that has happened. We would advise companies and investors to ensure that any shares, on which it is intended EIS relief will be claimed, are not issued during the company registration process but are issued only at a later date when the company is able to receive payment for them.

Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company's assets in the event of a winding up. Shares may carry limited preferential rights to dividends, but may not include rights where either:

  • the rights attaching to the share include scope for the amount of the dividend to be varied based on a decision taken by the company, the shareholder or any other person. (Please note: this exclusion covers only those shares which carry preferential rights and does not therefore prevent the voting of dividends in respect of non-preferential shares, nor does it prevent shareholders from choosing to waive a dividend payment should they wish to do so)
  • the right to receive dividends is 'cumulative' - that is, where a dividend which has become payable is not in fact paid, the company is obliged to pay it a later time, normally once funds become available

There must be no arrangements to protect the investor from the normal risks associated with investing in shares, and no arrangements at the time of investment for the shares to be sold at the end of the relevant period.

The shares may not be acquired using a loan made available on terms which would not have applied other than in connection with the acquisition of the shares in question.

The shares must not be issued under any 'reciprocal' arrangements, where company owners agree to invest in each other's companies in order to obtain tax relief.

There must be no arrangements (either at the time of issue of the shares or later) to structure a company's activities with the main purpose of allowing a party other than the company to benefit from the tax advantaged finance which the scheme is intended to incentivise; or where those activities have no commercial purpose other than to generate tax relief.

Investment can be directly into the company, or through an EIS Fund. For more on EIS Funds see paragraph 1.6.

For more information see VCM12000