Why you shouldn’t ignore the EIS and crowdfunding

Current Capital, a specialist in guiding people through their investment journeys, has explained the benefits of crowdfunding and the Enterprise Investment Scheme when looking for ways to raise finance for a new project within your business:

The case for crowdfunding

If you have been in the business world for a few years, there’s a good chance you’ve come across the following scenario at least once in your career. In the past, accountants, financial advisors or simply through word of mouth would have been the ways that investors heard of opportunities within business.

From there, necessary self certification would need to be completed to become a qualifying investor, before they were provided with a presentation, brochure and application form about the opportunity. Those still interested in the investment would then be expected to sign an Investment Memorandum, and then perform their own due diligence and negotiate terms of their investment. Even then the process wasn’t complete, as significant ‘know your client’ procedures would need completing before funds were transferred to a lawyer’s account.

This is obviously a process that can take quite some time to work though, with investors needing to arrange their own due diligence and cover for any associated costs. Fortunately, crowdfunding has made the entire process much more efficient.

A platform for raising money, support and general awareness towards a project, crowdfunding is particularly great for small businesses that have previously been turned away by High Street banks. In effect, it enables companies 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.

The four key benefits of crowdfunding are…

1. You receive advocates who will support both a business and their 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 if 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.

The case for the Enterprise Investment Scheme

Sometimes referred to as the EIS, the Enterprise Investment Scheme has been set up by the government and is a technique whereby companies are being encouraged to grow and attract investment from qualifying investors.

The EIS stands out as it gives investors numerous tax reliefs should they opt to buy new shares from companies involved, not to mention the fact it assists smaller, higher-risk trading companies when it comes to raising finance. Benefits of the scheme include:

· 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.

For example, the EIS sees a UK taxpayer who invests £100,000 into a qualifying company receiving a £30,000 tax rebate from the HMRC if their income tax liability had exceeded £30,000 in the previous tax year.

Head to the GOV.UK site or here for more details about the EIS. There, you will find the complete breakdown and rules on the various tax reliefs available, how tax relief can be claimed, times when tax relief can be reduced or withdrawn and how a company can qualify for the EIS.

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