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How to apply for an advance assurance for SEIS & EIS – and can you do it yourself?

Most investors will ask to see an advance assurance for SEIS, EIS or both before investing in your company. An advance assurance is simply a letter from HMRC that says your company and your fundraising round will be eligible for relief under SEIS or EIS.

It’s really important – it gives your investors some excellent tax reliefs if they are eligible.

To obtain an advance assurance, you need to send an application and certain information to HMRC. This includes:

  • The right form – available here. For now, you can download it and complete it, but soon this will be a fully online process. I was consulted by HMRC on this process and it’s good!
  • Your business plan.
  • A cover letter detailing the key information about your company, including what the business does (it must be a “qualifying trade“), how much you are raising and use of funds etc.
  • Your articles of association and any shareholders agreement.
  • Your most recently filed accounts (if any) or some projections if not (a P&L and balance sheet will do).
  • Depending on how busy HMRC is, it usually takes around 4-6 weeks for advance assurance applications to be processed.

Can you do it yourself?

Yes! If you have the time to get your head into the process to get a reasonable understanding of the rules.

If your company is brand new, has little history, a straightforward structure and is not part of a group, doing it yourself should not be problematic. If you go it alone and have the odd question or 2 along the way, we would be happy help, please just contact us.

What can go wrong if you do it yourself?

If the company has a long trading history, a trade which wanders into one of those that isn’t clearly a “qualifying trade“, is part of a group, is not a UK company, has multiple share classes, has acquired its trade from somewhere else (to name a few examples!), it might not be as straight forward to make the application correctly yourself.

The most common mistakes we have seen are usually not fatal to the application but tend to cause delays. This can be a big old pain when your startup has no cash and you have an investor ready to wire on sight of your advance assurance.

Common mistakes include not including all the information that HMRC needs to see to grant the advance assurance, submitting the company’s current articles and not those that will be place when the round closes and failing to recognise key information that should be disclosed and having an advance assurance granted where actually it should have been refused.

Every application we have made for an advance assurance has been approved by HMRC, including those made for my own companies, TableCrowd and SilkFred.

We’re here to help, if you would like a quote, please get in touch.

Subsidiaries & EIS / SEIS

Your company can be eligible for EIS and SEIS if it has a subsidiary, or is part of a group with multiple subsidiaries, provided that:

  • It owns at least 50% of the share capital in the subsidiary;
  • The subsidiary is not controlled by another company;
  • The subsidiary carries out a qualifying trade;
  • There are no subsidiaries in the group that do not carry out a qualifying trade; and
  • The subsidiary is at least 90% owned by your company if it will be spending the EIS/ SEIS funds.

Your company will not be eligible if it has a parent company controlling it.

The Finance Act 2015 – what’s new?

The Finance Act 2015 changed a few things when it received Royal Assent on 18th November 2015.

New restriction: 7 year rule

Your trade must be less than 7 years old for the business to be eligible for EIS. Note that it’s the age of the trade not the company that’s key.

There are 2 exceptions:

  1. It has previously used EIS.
  2. It meets the “50% turnover condition”. Total funds raised from all investors under the schemes over a 30 day period must be at least 50% of the company’s average annual turnover, taken over the last 5 years.

This change is applicable from 18th November 2015.

New restriction: maximum of £12m in risk finance

The maximum a business can raise under EIS and/or SEIS in it’s lifetime is £12m. If the business is part of a group, then the total is calculated across the group.

This change is applicable from 18th November 2015.

New relaxation: the 70% rule has been removed

You no longer need to spend 70% of SEIS funds before issuing EIS shares. But note that the SEIS and EIS shares cannot be issued on the same day.

This change is applicable from 6th April 2015.

These aren’t all the changes but are the ones we have most frequently advised on so far.

Using EIS after using SEIS – the 70% rule

There’s been an update to the rules since this post, please go here afterwards.

If your company is eligible for the Seed Enterprise Investment Scheme, the scheme allows you to raise a maximum of £150k.

If you want to raise more than 150k, you can use the Enterprise Investment Scheme as well. Using both schemes, you can raise up to £5m. (More info on these caps here.)

You must use SEIS before using EIS; you can’t do it the other way around.

You can raise the total funds you need in one go, providing that:

1. You take care on how you hold the cash and the timing of the share issues

You must have spent at least 70% of the SEIS funds before issuing the EIS shares and using EIS funds.

You must be able to demonstrate this – consider holding the SEIS funds in a separate account, so they do not get confused with other company money or revenues.

2. You carefully document receipt of the EIS funds

You may not be able to use the EIS funds for a number of months due to the 70% rule. There is a risk that the money would therefore be considered a loan. In such circumstances, the investor would not be eligible for tax relief under EIS.

You should have a subscription document that clearly states the terms under which the money is being invested.

For info on when the company and its shareholders can claim EIS & SEIS after raising investment, go here.

What is “connection by financial interest” and what are “associates” for EIS and SEIS?

An investor that is “connected by financial interest in a company” holds more than 30% of the share capital, voting rights or rights to assets if the company is wound up.

If they do, they will not be eligible to claim income tax relief under EIS or SEIS.

A person can become connected through an “associate” holding share capital, voting rights or rights to assets in a winding up. For example, if an investor owns 28% of a company and an associate owns 5%, that investor will not be able to claim income tax relief under the enterprise investment scheme or seed enterprise investment scheme.

Associates” include:

  • Business partners
  • Trustees of any settlement where you are a settlor or beneficiary
  • Relatives

Relatives” are:

  • spouses
  • civil partners
  • parents and grandparents
  • children and grandchildren

(Not siblings)

For EIS, this condition applies for the time period starting 2 years before the investment is made and ending 3 years after the investment is made, or three years after the commencement of the trade, whichever is later.

For SEIS, this condition applies for the time period starting with incorporation and ending 3 years after the investment is made, or three years after the commencement of the trade, whichever is later.

Learn more about income tax relief under EIS and SEIS here.

What’s a qualifying trade for EIS and SEIS?

The company’s activities must qualify for the company to be eligible for EIS and SEIS.

The general rule is that where the company is doing something to make money, its activities will qualify, although there is a list of activities that are excluded.

The list is long, but you should check it, especially if your trade touches on any of the following: land, property, professional services, royalties, financial activities, ships, metal, investment, farming or energy. The full list is below.

If your trade is on the excluded list, it’s not the end of the road. If the excluded activity forms less than 20% of the whole trade your company can still qualify.

Excluded activities for the Enterprise Investment Scheme & Seed Enterprise Investment Scheme

  • dealing in land, in commodities or futures in shares, securities or other financial instruments
  •  dealing in goods, other than in an ordinary trade of retail or wholesale distribution
  •  financial activities such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities
  •  leasing or letting assets on hire, except in the case of certain ship-chartering activities
  •  receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)
  •  providing legal or accountancy services
  •  property development
  •  farming or market gardening
  •  holding, managing or occupying woodlands, any other forestry activities or timber production
  •  shipbuilding
  •  coal production
  •  steel production
  •  operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment
  •  operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
  •  generating or exporting electricity which will attract a Feed-in Tariff, unless generated by hydro power or anaerobic digestion, or unless carried on by a community interest company, a co-operative society, a community benefit society or a Northern Irish industrial and provident society
  •  providing services to another person where that person’s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services

Great news if you company’s trading activities qualify! Check out the income relief that your lucky investors will benefit from under EIS and SEIS.

After raising investment, when can the company and its shareholders claim EIS & SEIS?

Under EIS, a claim cannot be made by the company until it has been trading for at least 4 months.

The claim must be made within 2 years of the end of the tax year in which the shares were issued, or within 2 years of the end of the 4 month trading period, whichever is later.

Under SEIS, if the company has commenced trading, a claim cannot be made by the company until it has been actively trading for at least 4 months. If the company hasn’t commenced trading, it cannot make a claim until at least 70% of the SEIS funds raised in the round have been spent (in the correct way).

Under both EIS and SEIS, shareholders have 5-6 years to claim their relief after the company has done its part. To work out the deadline, take the year of the investment, fast forward to 31st January and add 5 years.

To learn more about the amount that can be invested under EIS and SEIS go here.

Maximum investment under EIS and SEIS

Maximum investment into the company

A company can raise £5m in a 12 month period under EIS.

A company can raise £150k in its lifetime under SEIS.

Under EIS and SEIS collectively, a company can raise £5m in total in a 12 month period.

Maximum investment by an individual

An individual investor can invest £1m per year under EIS.

An individual investor can invest £100k per year under SEIS.

These differing caps are due to the tax reliefs under SEIS being more generous than under EIS.

Read more about income tax relief for investors under EIS or SEIS.

Income tax relief under the Seed Enterprise Investment Scheme (SEIS)

Rate of relief

For investments made after 6 April 2012, the rate of income tax relief is 50% of the cost of the shares. For example, the income tax relief on an investment of £10,000 would be £5,000.

SEIS is only applicable for investments made after 6 April 2012.

To be eligible for the relief, the investor must be a UK resident and pay income tax in the UK. Remember, it’s a tax relief; so the investor must be paying income tax to claim it.

Investment limit

The annual tax relief limit is £50,000 which means an investment of up to £100,000 is possible per year.

When & how investors receive their relief

Depending on both the timing of the investment and the claim for relief, income tax relief will be received either through:

  • a rebate from HMRC (“Scenario 1“); or
  • off-set against future income tax (“Scenario 2“).

Scenario 1

Where the claim is made in one tax year for an investment in a previous tax year, the investor will receive a rebate. E.g. Investment made in tax year 2012/2013 + claim for relief made in tax year 2013/2014 = rebate

Scenario 2

Where the claim is made in the same tax year as the investment, the tax relief will be off-set against income tax to be paid in that year. E.g. Investment made in tax year 2013/2014 + claim for relief made in tax year 2013/2014 = off-set.

Investors generally prefer a rebate, so note that even in scenario 2, it is possible to request that the relief is applied to the preceding year. The rules allow for a one year “carry back”. However, there is no “carry back” before April 2012, as SEIS wasn’t applicable then.

The “carry back” could be used to split the tax relief across the two years for another reason: where the individual hasn’t paid enough income tax in one year to use the full 50% relief.

Deadline to claim income tax relief

The investor has between 5 and 6 years to claim the relief. To work out the deadline, take the date of the investment, fast forward to 31 January and add 5 years. For example, relief on an investment made in February 2013 could be made any time before 31 January 2019.

See how the rules for claiming income tax relief under the Enterprise Investment Scheme compare.

Income tax relief for investors under the Enterprise Investment Scheme (EIS)

Rate of relief

For investments made before 6 April 2011, the rate of income tax relief is 20% of the cost of the shares. For example, the income tax relief on an investment of £10,000 would be £2,000.

For investments made after 6 April 2011, the rate of income tax relief is 30% of the cost of the shares. For example, the income tax relief on an investment of £10,000 would be £3,000.

To be eligible for the relief, the investor must be a UK resident and pay income tax in the UK. Remember, it’s a tax relief; so the investor must be paying income tax to claim it

Investment limit

The annual tax relief limit is £300,000 which means currently an investment of up to £1,000,000 is possible per year.

When & how investors receive their relief

Depending on both the timing of the investment and the claim for relief, income tax relief will be received either through:

  • a rebate from HMRC (“Scenario 1“); or
  • off-set against future income tax (“Scenario 2“).

Scenario 1

Where the claim is made in one tax year for an investment in a previous tax year, the investor will receive a rebate. E.g. Investment made in tax year 2010/2011 + claim for relief made in tax year 2011/2012 = rebate

Scenario 2

Where the claim is made in the same tax year as the investment, the tax relief will be off-set against income tax to be paid in that year. E.g. Investment made in tax year 2013/2014 + claim for relief made in tax year 2013/2014 = off-set.

Investors generally prefer a rebate, so note that even in scenario 2, it is possible to request that the relief is applied to the preceding year. The rules allow for a one year “carry back”.

The “carry back” could be used to split the tax relief across the two years for another reason: where the individual hasn’t paid enough income tax in one year to use the full 20% or 30% relief.

Deadline to claim income tax relief

The investor has between 5 and 6 years to claim the relief. To work out the deadline, take the date of the investment, fast forward to 31 January and add 5 years. For example, relief on an investment made in June 2009 could be made any time before 31 January 2015.

See how the rules for claiming income tax relief under the Seed Enterprise Investment Scheme compare.