EIS Qualifying Companies: Who Can Use the Enterprise Investment Scheme?

Last updated: April 2026

The Enterprise Investment Scheme is one of the most generous tax relief programmes available to UK startups. It offers investors 30% income tax relief, capital gains tax deferral, and loss relief if the company fails. For companies, it makes raising equity investment significantly more attractive.

But not every company qualifies. HMRC imposes strict conditions on company age, size, trade type, asset levels, and how the money is used. Getting any of these wrong means your investors lose their relief, and you lose credibility with future backers.

This guide covers every qualifying condition in detail, the full list of excluded trades, the advance assurance process, and what happens if your company loses qualifying status after investment.

Summary of EIS qualifying conditions

Before diving into the detail, here is the complete list of conditions your company must satisfy.

Each of these conditions has specific rules and edge cases. The sections below explain them individually.

Company age requirement

Your company must receive its first EIS investment within 7 years of its first commercial sale. HMRC defines "first commercial sale" as the first time the company (or any qualifying subsidiary) sells a product or service to a customer. This is not the date of incorporation, which is a common misconception.

If your company was incorporated in 2020 but did not make its first sale until 2022, the 7-year window runs from 2022 to 2029.

Knowledge-intensive companies get 10 years

Knowledge-intensive companies (KICs) benefit from a 10-year window. To qualify as knowledge-intensive, your company must meet one of two conditions.

Condition A (innovation): The company has spent at least 15% of its operating costs on research, development, or innovation in at least one of the three years before the share issue. It must also be creating intellectual property and intend for it to form the basis of the business.

Condition B (R&D spend): The company has spent at least 10% of its operating costs on R&D in at least one of the three years before the share issue.

In both cases, the company must also meet one of these additional tests:

• It has, or is in the process of creating, intellectual property
• Employees with relevant masters or PhD qualifications make up at least 20% of the workforce

KIC status also raises the annual investment limit from £5 million to £10 million and the individual investor limit from £1 million to £2 million.

What counts as the first commercial sale?

HMRC takes a broad view. Revenue from pilot customers, paid beta testers, or early access sales all count. Revenue from grants, competitions, or R&D tax credits does not count as a commercial sale. If a predecessor company or group company made a sale, that date applies even if the current EIS-issuing company is newly incorporated.

The key date is when the first arm's length transaction with a customer took place, not when the company was formed or when the product was feature-complete.

Employee count

Your company must have fewer than 250 full-time equivalent (FTE) employees at the time the shares are issued. This count includes all employees of the company and any qualifying subsidiaries.

Part-time employees are counted proportionally. An employee who works 20 hours per week when full-time hours are 40 counts as 0.5 FTE. Directors who draw a salary are counted as employees. Contractors are not typically counted unless HMRC determines they are de facto employees under IR35 principles.

If your company is close to the 250 threshold, plan the timing of your share issue carefully. Seasonal hiring, contractors converting to permanent roles, or acquisitions can push you over the limit.

Gross assets test

The gross assets test has two parts.

Before investment: Your company's gross assets must be under £15 million immediately before the shares are issued.

After investment: Your company's gross assets must be under £16 million immediately after the investment is received.

Gross assets means the total value of everything on the company's balance sheet before deducting any liabilities. This includes cash, equipment, intellectual property, stock, debtors, and any other assets. It is not net assets. A company with £14 million in assets and £12 million in debt still has £14 million in gross assets.

If your company is part of a group, the gross assets of all group companies are aggregated for this test.

Practical impact

This test rarely affects very early stage companies, but it becomes relevant for companies that have received prior investment rounds, hold significant IP on their balance sheet, or have been revalued. If you are approaching the threshold, get a professional valuation before issuing shares.

Annual and lifetime fundraising limits

EIS shares count toward several caps.

"All venture capital schemes" means the combined total of EIS, SEIS, and Venture Capital Trust (VCT) investment the company has ever received. If your company raised £250,000 through SEIS and £4 million through previous EIS rounds, you have £7.75 million of headroom remaining.

Amounts raised through other mechanisms (bank loans, revenue-based financing, grants, convertible loan notes before conversion) do not count toward these caps.

Permanent establishment in the UK

The company must have a permanent establishment in the United Kingdom. This means a fixed place of business through which the company carries on its trade: an office, a workshop, a factory, or similar.

A company registered at Companies House but operating entirely from overseas does not meet this test. The permanent establishment must be genuine and functional, not simply a registered office address.

Listing restriction

The company must not be listed on a recognised stock exchange at the time of the share issue, and there must be no arrangements in place for it to become listed.

Companies listed on AIM (the Alternative Investment Market) are not considered listed on a recognised stock exchange for EIS purposes. AIM-listed companies can therefore qualify for EIS, provided they meet all other conditions.

Excluded trades: the full list

This is where most companies fail the qualifying test. HMRC maintains a list of trades that cannot benefit from EIS. If your company's trade falls on this list, it does not qualify, even if every other condition is met.

Important nuances on excluded trades

Mixed trades: If your company carries on both a qualifying and an excluded trade, the excluded trade must be "substantially" less than the whole. HMRC's guidance uses a 20% rule of thumb. If the excluded activity represents more than 20% of the company's trade (measured by turnover, assets employed, or expenses), the whole company may be disqualified.

Software for excluded sectors: Building software used by financial services companies is not itself an excluded trade. The exclusion applies to carrying on the trade, not to providing tools or services to companies in excluded sectors. A fintech company that builds payment processing software qualifies. A company that uses its own capital to trade financial instruments does not.

Royalties and licences: Receiving licence fees is excluded, but only where that is the main trade. A SaaS company licensing software to customers is carrying on a qualifying trade (software development), not a licensing trade. HMRC looks at the substance of what the company does.

Hotels: This exclusion covers the operation and management of hotels. It does not cover hotel booking platforms, hotel management software, or hospitality consultancy. The company must be running the hotel itself to be excluded.

Property development: Buying a property as a business premises is not property development. The exclusion targets companies whose trade is buying, developing, and selling property for profit. A company that happens to own its office building qualifies for EIS.

Energy generation: This is a broad exclusion that covers solar farms, wind farms, biomass, anaerobic digestion, and any form of electricity, heat, or fuel generation. It also covers companies that own or manage energy generation assets. Energy technology companies that build equipment used by generators may still qualify, provided they are selling the technology rather than generating energy themselves.

The purpose of issue test

The money raised from issuing EIS shares must be used for a qualifying business activity. This means either:

1. Carrying on a qualifying trade (or preparing to carry one on within 2 years)
2. Preparing to carry on a qualifying trade that begins within 2 years of the share issue
3. Research and development expected to lead to a qualifying trade

The money must not be used to:

• Acquire shares in another company (unless it becomes a qualifying subsidiary)
• Acquire an existing business as a going concern
• Repay loans (with limited exceptions for bridging finance that was itself used for a qualifying purpose)
• Make loans to other people or companies

HMRC expects the investment to grow the company's qualifying trade. Using EIS money to buy out existing shareholders, refinance debt, or make passive investments will disqualify the shares.

The "risk to capital" condition

Introduced in 2018, this condition requires that the investment carries a genuine risk of loss of capital. The company must have objectives to grow and develop over the long term. Investments designed to preserve capital, generate guaranteed returns, or provide asset-backed security do not qualify.

This test was introduced to prevent EIS being used for low-risk, asset-backed tax shelters. HMRC assesses this by looking at whether the company's activities involve genuine commercial risk, whether the business plan shows growth ambitions, and whether the investment structure creates any form of capital preservation.

Trading requirement

The company must be carrying on a qualifying trade, or it must begin trading within 2 years of the share issue. During any period before trading begins, the company must be preparing to trade (for example, developing a product, hiring staff, or setting up operations).

If the company does not begin trading within 2 years, the shares lose EIS qualifying status and investors lose their relief.

The trade must be conducted on a commercial basis with a view to profit. A company that operates at a loss while growing is fine. A company that has no realistic plan to become profitable may fail this test.

Subsidiary rules

A qualifying company can have subsidiaries, but there are rules.

Qualifying subsidiaries: The EIS company must hold more than 50% of the subsidiary's shares. The subsidiary must also meet the EIS qualifying conditions (no excluded trades, UK permanent establishment, etc.).

Property-holding subsidiaries: A subsidiary that exists solely to hold property used in the parent's qualifying trade is acceptable.

Non-qualifying subsidiaries: If the EIS company controls a subsidiary that does not meet the qualifying conditions (for example, one carrying on an excluded trade), the whole group may be disqualified.

Group structure: The EIS company itself must not be a subsidiary of another company. It must not be controlled by another company. This means no single corporate shareholder can hold more than 50% of the ordinary share capital.

Share requirements

EIS investment must be made by subscribing for new ordinary shares. This means:

• The shares must be newly issued (not purchased from an existing shareholder)
• They must be ordinary shares (not preference shares with fixed dividends or liquidation preferences)
• They must be full-risk shares (the investor must be exposed to the same downside as other ordinary shareholders)
• They must be paid for in cash (not in exchange for services, IP, or other non-cash consideration)

Shares with certain enhanced rights can still qualify, provided they do not carry preferential rights to assets on a winding up. Shares with anti-dilution provisions, drag-along rights, or information rights are generally acceptable. Shares with a guaranteed return or capital protection are not.

Connected persons cannot claim relief

An investor cannot claim EIS relief if they are "connected" with the company. Connected means:

• The investor (or an associate) is an employee or director of the company (with exceptions for directors who became directors only because of the investment and who were not previously connected)
• The investor (or an associate) holds more than 30% of the ordinary share capital, voting rights, or rights to assets on winding up
• The investor has a loan relationship with the company that is not on commercial terms

Associates include spouses, civil partners, parents, grandparents, children, grandchildren, and business partners.

A director who was appointed specifically to bring EIS investment and who had no prior connection can still claim relief, provided they do not hold more than 30% after the investment.

How to apply for advance assurance

Advance assurance is not mandatory, but it is strongly recommended. It gives your investors confidence that HMRC considers your company EIS-qualifying before they invest.

Step 1: Prepare your application

You need to submit HMRC form EIS/AA (Advance Assurance). This can be done online through HMRC's digital service or by post. The form asks for:

• Company details (name, registration number, UTR, date of incorporation)
• A description of the company's trade
• The amount you plan to raise and what you will use it for
• Details of any existing shareholders
• Financial statements (or projections if pre-revenue)
• Details of the share structure
• A business plan or investor deck

Step 2: Submit the application

Submit online via the HMRC EIS/SEIS Advance Assurance digital service, or post to:

HMRC Small Company Enterprise Centre SO777 Newcastle upon Tyne NE98 1ZZ

Step 3: Wait for HMRC's response

HMRC aims to respond within 6 weeks. In practice, response times vary from 4 to 12 weeks depending on the complexity of your application and HMRC's workload.

If HMRC needs more information, they will write to you with questions. This can add several weeks to the process.

Step 4: Receive the assurance letter

If approved, you receive a letter confirming that HMRC considers your company likely to qualify for EIS, based on the information provided. This letter is not a guarantee. If your circumstances change before you issue shares, the assurance may no longer apply.

Step 5: Issue shares and apply for EIS3 certificates

After you have issued shares and received the investment, you submit a compliance statement (form EIS1) to HMRC. Once HMRC approves, they authorise you to issue EIS3 certificates to your investors. Investors use the EIS3 to claim their tax relief.

Timeline for the full process

The total time from application to investors receiving their EIS3 certificates is typically 6 to 12 months. Plan accordingly. Investors cannot claim relief until they have the EIS3.

What happens if you lose qualifying status

If your company stops meeting the qualifying conditions during the first 3 years after the share issue, your investors may lose some or all of their EIS relief.

Scenarios that trigger loss of status:

• The company begins carrying on an excluded trade
• The company is acquired by or merged into another company
• The company lists on a recognised stock exchange
• The company's assets or employee count exceed the thresholds
• The investment money is used for a non-qualifying purpose
• A connected person claims relief they are not entitled to

Consequences for investors:

• Income tax relief is clawed back (HMRC will issue an assessment)
• CGT deferral is crystallised (the deferred gain becomes payable)
• CGT exemption is lost (disposal proceeds become chargeable)
• Loss relief may still be available if the company genuinely fails

Partial loss of status: In some cases, only some shares lose qualifying status. For example, if part of the investment is used for a non-qualifying purpose, only the shares attributable to that portion lose status.

The 3-year minimum holding period

Investors must hold their shares for at least 3 years from the date of issue (or 3 years from the date the company began trading, if later). If shares are sold within this period, income tax relief is clawed back in full.

This means both the company and the investor have responsibilities during the 3-year window. The company must maintain qualifying status. The investor must not sell their shares.

Practical tips for maintaining qualifying status

1. Track your employee count. If you are approaching 250 FTE, consider the timing of new hires relative to any share issues.

2. Monitor gross assets. A large fundraise, asset purchase, or revaluation can push you over £15 million. Know your balance sheet position before issuing shares.

3. Keep clear records of how EIS money is spent. Ring-fence the funds and maintain a paper trail showing they were used for qualifying trade activities.

4. Avoid acquiring businesses. Using EIS money to buy an existing business is one of the most common disqualifying events. Grow organically or ensure any acquisition is structured as an asset purchase for a qualifying purpose.

5. Get professional advice before pivoting. If your business model changes, check whether the new trade is still qualifying before proceeding.

6. Communicate with investors. Keep your EIS investors informed about any significant changes to the business that could affect their relief.

Frequently asked questions

Can a company that has not started trading yet apply for EIS advance assurance?

Yes. Pre-trading companies can apply for advance assurance, provided they intend to begin a qualifying trade within 2 years of the share issue. You will need to provide a business plan, financial projections, and a clear description of the trade you intend to carry on. HMRC will assess whether the planned activity qualifies.

Does an AIM-listed company qualify for EIS?

Yes. AIM is not a recognised stock exchange for EIS purposes. Companies listed on AIM can qualify, provided they meet all other conditions. Companies listed on the London Stock Exchange Main Market, NASDAQ, NYSE, or other recognised exchanges do not qualify.

Can a company that has previously received SEIS investment also use EIS?

Yes. Many companies raise SEIS funding first and then graduate to EIS as they grow. The combined total from all venture capital schemes (SEIS, EIS, VCT) must not exceed £12 million over the company's lifetime. The SEIS investment counts toward this cap.

What if my company carries on two trades, one qualifying and one excluded?

HMRC applies a "substantially the whole" test. If the excluded trade represents a small and ancillary part of the business (typically under 20% measured by turnover, assets, or expenses), the company can still qualify. If the excluded activity is more than incidental, the whole company may be disqualified. Get professional advice if you are in this position.

How long does advance assurance last?

Advance assurance is based on the information you provided at the time of application. There is no fixed expiry date, but HMRC expects you to issue shares within a reasonable time (typically 12 months). If your circumstances change significantly, the assurance may no longer apply, and you should submit a new application.

Can a sole trader or partnership use EIS?

No. EIS is only available to limited companies (or community interest companies and certain other corporate structures). Sole traders and partnerships cannot issue shares and therefore cannot use EIS. If you are a sole trader looking to raise equity investment with tax relief, you would need to incorporate first.

What is the penalty for incorrectly claiming EIS status?

There is no specific penalty for the company, but HMRC will withdraw the EIS3 certificates and claw back relief from investors. This creates significant reputational damage and potential legal liability. Investors may have contractual claims against the company for loss of expected tax relief. In cases of deliberate misrepresentation, HMRC may pursue penalties for providing false information.

Can overseas investors claim EIS relief?

Only investors who are UK taxpayers can claim EIS income tax relief, because the relief is set against UK income tax liability. Non-UK residents cannot claim the income tax relief, although the company itself can still issue EIS-qualifying shares. CGT deferral is similarly only available against UK chargeable gains.

Further reading

For a complete overview of the Enterprise Investment Scheme, including investor benefits, worked examples, and fundraising strategy, read the Enterprise Investment Scheme: Complete Guide for UK Companies.

To check whether your company meets the basic qualifying criteria, use the SEIS and EIS Eligibility Checker.