Does 'financial health' matter?

📘 Overview

For a company to qualify for the Enterprise Investment Scheme (EIS), it must not be considered “in financial difficulty” at the time of issuing shares. This rule ensures that EIS funding supports viable businesses, not those facing insolvency or severe distress.

💡 What Does “In Financial Difficulty” Mean?

A company is regarded as in financial difficulty if:

• It cannot pay its debts as they fall due, or
• Its liabilities exceed its assets (i.e. a negative balance sheet position).

Additional conditions apply where more than half of the company’s subscribed share capital has been lost through accumulated losses. However, HMRC allows certain adjustments based on factors such as upcoming investments or R&D expenditure that could strengthen the balance sheet.

🔍 When the Test Applies

The company must meet the financial health requirement at the beginning of “Period B”, meaning:

• On the date shares are issued, and
• When it would not be reasonable to assume that the company would be regarded as “in difficulty”.

📊 EU and HMRC Definitions

HMRC’s approach is guided by EU State Aid rules, which define a company in difficulty as one that, without external intervention, would almost certainly be forced out of business in the short or medium term.

Under these definitions, HMRC generally considers a company to be “in difficulty” when:

• It meets the insolvency criteria under the Insolvency Act 1986, such as being unable to pay debts as they fall due, or
• The value of its assets is less than its liabilities, including contingent and prospective liabilities.

🔍 Special Considerations for Older Companies

Where a company is seeking investment after its initial investing period (normally 7 years from first commercial sale, or 10 years if knowledge-intensive), it will also be regarded as in difficulty if:

• More than half of its subscribed share capital has been lost through accumulated losses.

This happens when the deduction of accumulated losses from reserves and other equity results in a negative cumulative amount greater than half of the subscribed share capital.

💡 Adjustments HMRC May Accept

HMRC will start with your latest accounts but will also consider adjustments that reflect your financial position at the date of the share issue. Examples include:

• Future confirmed investment: If you can demonstrate irrevocable funding commitments (not related to tax incentives).
• R&D costs: If you’ve expensed R&D that could have been capitalised, HMRC may consider this when assessing your balance sheet.

Such adjustments can help demonstrate that, despite accounting losses, your company remains financially viable.

✅ The Practical Test

In practice, HMRC will consider whether your company appears capable of:

• Continuing operations in the short to medium term, and
• Attracting independent, commercial investment without state aid.

If your company can show a credible path to growth and ongoing operations, supported by evidence such as funding rounds, contracts, or capitalised development, it is unlikely to be deemed “in difficulty.”