My EIS Investment Failed – Is Loss Relief My Only Option?

If you invested in a startup under the Enterprise Investment Scheme (“EIS”) and the company has now failed, it can feel like the whole point of EIS has collapsed along with it. For many investors, the first question is whether loss relief is the only option available now that the investment has failed.

Loss relief can be a valuable part of the solution, but it may not be the only step worth considering.

This article explains what “failure” means in terms of EIS, what loss relief does (and doesn’t) cover, and when it is worth getting advice because you may have other potential routes, including potential claims arising from advice you have received, the promotion of the investment, or how the investment was structured.

EIS Investment Failure: Potential Options

EIS investments can fail. That is part of how the scheme is designed. The tax reliefs are offered because early-stage investing is inherently risky, and the scheme aims to encourage investment into smaller companies that may otherwise struggle to raise capital.

If your EIS company has gone into liquidation or becomes worthless, it does not automatically mean you have made a bad decision or that you have no options left. In many cases, it simply means that the investment has played out in the way that high-risk investments sometimes do.

Claiming loss relief is often the first step. But depending on what happened, it may not be the only option, particularly where there was regulated advice involved, risks were downplayed, or there were compliance issues that only surfaced after the collapse.

It is usually helpful to distinguish between two broad scenarios. A company can fail because the commercial venture did not succeed, even though it was promoted and run in a broadly proper way. Alternatively, the failure may expose issues with the way the investment was promoted, advised upon, or structured, and those issues can sometimes open up other routes.

• Genuine commercial failure
  This is where the company does not succeed, despite operating honestly and in line with what was presented to investors. In those cases, tax reliefs (including loss relief) are often the main route to recover value. They are not a “get out of jail free card”, but they can substantially soften the blow.
• Failure that reveals issues in advice, promotion, or structure
  Some failures expose problems that were not obvious at the time of investment. That might include overly optimistic projections presented as realistic, risk warnings that were glossed over, unsuitable advice, or failures in EIS compliance that only emerge later. In those cases, loss relief may still be relevant, but it may sit alongside other remedies, particularly where professional advisors or promoters were involved.

What Does “Failure” Mean For An EIS Investment?

When investors say an EIS investment has “failed”, they can mean different things and the different outcomes can lead to different legal and tax consequences, affecting what you can claim and when. From a legal perspective, you may need to understand what actually happened and whether the failure points to something more than commercial misfortune. From a tax perspective, you generally need to establish when the loss has crystallised.

• Company liquidation or administration

If the company enters liquidation or administration and the shares ultimately become worthless, that is often the clearest scenario for loss relief. However, insolvency processes can take time, and it can often be unclear when HMRC will accept that the shares are genuinely worthless.

• Informal collapse or cessation of trade

Some companies do not enter a formal insolvency process. They may stop trading, stop filing accounts, or disappear without proper closure. The company may still legally exist, but the shares may be effectively worthless. This can make it harder to claim relief unless you take steps to crystallise your loss (e.g. by making a negligible value claim).

• Share dilution to near-zero value

A company can survive but still deliver a near–total loss to early investors. Further fundraising rounds may dilute earlier shareholders heavily, leaving their shares with minimal value. Whether loss relief is available will depend on whether there has been a disposal event and whether the shares are genuinely worthless. Even where the company continues trading, there may be questions about disclosure and investor communication around the time of the investment that are worth examining.

• Loss of EIS status after investment

Sometimes investors discover that the company has lost EIS status, or that compliance issues mean relief is challenged or withdrawn. This can be unsettling because it raises the fear of HMRC clawback. It can also affect the loss relief position, and it is an important reason to get advice early rather than assuming the tax position will take care of itself.

A key point is that “failure” does not always coincide with a tax loss. You may feel that the investment is gone long before the tax system will recognise that you have suffered a loss.

Loss Relief: What It Does, And What It Does Not Do

Loss relief is designed to reduce the financial impact of an EIS investment that has fallen in value or become worthless. It allows you to claim relief for your loss by offsetting it against income tax or capital gains tax.

What it does not do is reverse the investment or make the investor whole. It reduces the net cost of the loss through the tax system, but it does not eliminate risk or compensate for every consequence of a failed investment.

• How loss relief works in practice

When you calculate the loss, you do not claim relief on the full amount invested. Instead, the allowable loss is reduced to reflect the EIS income tax relief you previously claimed and retained. This prevents you from benefiting from tax relief twice on the same amount.

For example, if you invest £100,000 into an EIS company and claim EIS income tax relief at 30%, you will benefit from a £30,000 reduction in your income tax liability.

If you later dispose of the shares for nil consideration, or the shares become worthless, your allowable loss for tax purposes is usually calculated by deducting the EIS income tax relief you previously claimed from the amount invested. In this example, the allowable loss will be £70,000 (£100,000 investment less £30,000 tax relief claimed). This is the figure you can potentially set against your income tax or capital gains tax liabilities.

If you are an additional-rate taxpayer paying income tax at 45%, and you claim the loss against income, the tax saving on the loss could be £31,500 (£70,000 x 45%).

When you combine the original EIS income tax relief (£30,000) with the loss relief (£31,500), the total tax benefit is £61,500.

The net cost of the £100,000 investment after tax relief is £38,500. The investment has still failed, but the overall loss has been significantly reduced.

• Amount invested: £100,000
• EIS income tax relief claimed: £100,000 x 30% = £30,000
• Allowable loss for tax purposes: £70,000
• Tax saving if additional-rate tax payer (45%): £70,000 x 45% = £31,500
• Total tax benefit: £30,000 + £31,500 = £61,500
• Net cost of investment: £100,000 – £61,500 = £38,500

Please note that this is a simplified example, and you should speak with your tax advisor / accountant about your personal tax position and the most tax-efficient way to make any claim.

• What loss relief does not cover

Loss relief only applies to the loss on the EIS shares themselves. It does not compensate for wider financial or personal consequences of the investment.

In particular, loss relief does not cover any:

• Opportunity cost, such as returns you might have earned if you had invested your money elsewhere;
• Fees paid for professional advice in connection with the investment;
• Interest on borrowed funds used to invest; and
• Distress, inconvenience, or time spent dealing with the failure.

Loss relief can therefore reduce the impact of a failed investment, but it does not remove the loss altogether.

When Loss Relief Is Not The End Of The Matter

While loss relief is often the first step, it is worth asking a second question, which is whether anything about the investment process itself now looks questionable.

The following examples may prompt you to consider seeking further advice:

• You relied on an advisor, accountant or investment introducer

Where you invested based on a professional’s advice, there may have been a duty of care owed to you, and your loss may not be limited to what the tax system can compensate. The role the advisor played, and whether they were regulated, can be critical. The fact that an EIS investment is high-risk does not mean unsuitable advice can be excused.

• The risks were downplayed, or the tax benefits were overstated

Promotions of investments often focus on the tax benefits, with risk warnings treated only as a formality. In reality, EIS relief is dependent on very specific qualifying criteria that a company must comply with. If the investment was presented as low-risk or “HMRC-approved”, that can raise concerns, particularly if the company later loses EIS status or collapses quickly.

• The investment did not match your risk profile

EIS can be appropriate for sophisticated investors who understand the risks. It is not suitable for everyone. If the investment was recommended or promoted to you despite being inconsistent with your circumstances or risk appetite, that may be relevant.

• Due diligence was limited or non-existent

Some EIS opportunities are marketed as being credible while offering little meaningful due diligence. If you now suspect that key information was missing, or that the business was far weaker than presented, that can matter for your potential legal routes.

Advisor And Promoter Liability: When Professional Negligence Is Relevant

If you invested on the basis of professional advice, you may have a route beyond tax relief, particularly where the advice was unsuitable or incomplete.

• Duty of care and suitability

Regulated advisors and some professionals owe duties of care to their clients. In broad terms, they should ensure that their recommendations are suitable, that the risks are explained properly, and that investments are consistent with their clients’ objectives and financial positions.

• Failures in EIS advice

EIS investments can often be recommended as “tax planning” without a meaningful assessment of risk, and the investor may be encouraged to treat EIS relief as a certainty. Sometimes conflicts of interest can arise where commissions can influence recommendations, and sometimes investment documentation is not as robust as it should be.

• Regulated advice vs unregulated promotion

There is an important distinction between authorised advice and unregulated promotion. If you received regulated advice, there may be formal complaint and claim routes available. If the investment was introduced or promoted by an unregulated party, different issues arise, and evidence becomes particularly important.

• Time limits and limitation periods

Even where a claim exists, it can be lost through delay. There are specific time limits in which you may be allowed to raise a claim. If you suspect that the advice or promotion contributed to your loss, it is sensible to seek advice sooner rather than later, even if you intend to claim loss relief in the meantime.

HMRC Issues After An EIS Failure

A common fear after an EIS failure is not just losing the investment, but also facing unexpected HMRC problems.

Investors worry that HMRC might:

• withdraw EIS relief;
• challenge the original claim years later; or
• scrutinise the loss relief claim.

Although these may not be relevant in every case, HMRC does have the power to withdraw EIS relief if EIS conditions are breached. The impact depends on what happened and when.

It is important to understand that even if income tax relief is withdrawn, a loss may still exist and loss relief may still be applicable.

If you are dealing with HMRC correspondence, or suspect the company’s EIS status may not have been secure, early advice can help you avoid potential future issues in making incorrect claims or responding in a way that causes HMRC to scrutinise the investment in more detail.

Director Conduct And Company-Level Issues

It is important not to assume misconduct simply because a company failed. EIS companies can fail for various reasons, with many failures resulting from poor commercial decisions. However, some collapses reveal issues that investors could not have known at the time of the investment, such as:

• EIS funds being used in ways that were inconsistent with what investors were told;
• Directors’ conflicts of interest and connected party transactions;
• misleading statements in investment pitch materials;
• failures to disclose important information; and
• breaches of directors’ duties.

The key point is that the investment becoming worthless does not automatically create a claim. However, where there are indicators of misconduct by the company or its directors, that may be relevant to whether recovery options exist beyond loss relief.

Practical Next Steps For Investors

If your EIS investment has failed, taking the right steps early can help protect your position.

• Gather and preserve your documents

Keep your EIS 3 certificate, share certificates, subscription agreement, shareholders’ agreement, and any pitch materials or correspondence. These documents are not just useful for tax claims, but they can be critical if advice or promotion is questioned later.

• Identify who advised or introduced you to the investment and what they said

Make a note of who was involved, whether they were regulated, and what role they played in the decision to invest. If you have suitability reports, risk warnings or formal communications, retain them. The nature of the advice or promotion can affect whether there is any claim beyond tax relief.

• Keep track of key dates

Note the investment date, the date you became aware of any problems, and any insolvency milestones. These dates can matter for both tax claims and limitation periods for legal claims.

• Avoid informal complaints before taking advice

Investors sometimes contact advisors or promoters to express frustration before they understand the legal position. If you suspect wrongdoing or poor advice, it is often better to take advice first and respond strategically.

Not every failed EIS investment needs a legal review. In many cases, claiming loss relief will be the sensible solution and the matter ends there.

However, it is worth considering obtaining legal advice where:

• the amounts you invested were substantial, and you want to maximise recovery of your investment;
• you relied on advice or were actively steered into the investment;
• the investment was promoted aggressively with limited risk discussion;
• you suspect EIS compliance problems;
• you believe directors misused funds or misled shareholders; or
• you have concerns about time limits or evidence.

How We Can Help

EIS cases often involve a mixture of tax, financial regulation, professional negligence and legal issues. The earlier you obtain advice, the easier it is to keep your options open, even if you ultimately decide not to pursue anything beyond loss relief.

Here at The Jonathan Lea Network, we advise on failed EIS investments, including situations where the investment has simply not worked commercially and situations where the failure raises questions about advice, promotion or compliance. Our role is to help you understand where you stand, what options are realistically available, and which steps are worth taking in your specific circumstances.

We can help you:

• review how the investment was promoted, advised upon, and structured, and identify whether there are any issues beyond straightforward loss relief;
• assess whether loss relief is available, how it should be claimed, and how it fits alongside any wider strategy;
• consider potential claims arising from unsuitable advice, misleading promotion, or failures in EIS compliance;
• advise on director conduct and company-level issues where the collapse raises concerns about how the business was run; and
• help you manage correspondence or engagement with HMRC where EIS relief or loss relief may be challenged.

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

Q&A: EIS Investment Failure

 

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited. 

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