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When does an advance assurance for SEIS or EIS expire?

How long does your advance assurance last for? We get asked this a lot!

An advance assurance does not expire on a particular date and it does not last for a specified time period.

Your advance assurance is only as good as the information you provided to HMRC to grant it. If something changes, for example, your company’s group structure, trade or your articles of association, your company may fall outside eligibility, regardless of the fact you have an advance assurance in your hand from HMRC.

If you hold something back from HMRC to get the advance assurance granted, this does not mean your company is eligible. It just means that HMRC doesn’t yet know that it’s not.

HMRC makes the decision about the eligibility of your shareholders when you submit the application to claim for them after your round has closed.

They can withdraw the EIS or SEIS relief after it has been approved if they later discover anything that means the company falls outside eligibility.

Advance assurance for SEIS… or EIS… or both?

Even if you’re just planning an SEIS round, when you apply to HMRC for your advance assurance, it makes sense to also ask for an advance assurance for EIS.

The two schemes are very similar, with primary differences relating to the rate of tax relief, timings for when applications may be made and financial caps.

In most other respects (big sweeping generalisation here!), where HMRC can grant an advance assurance for SEIS, in most circumstances, they can also grant one for EIS.

Although remember, your advance assurance is only as good as the information you provide to HMRC and any change in that information (e.g to your company’s trade, articles of association or group structure) could take your company outside of eligibility, irrespective of the fact HMRC have granted an advance assurance.

 

Is a new director investor eligible for EIS? The “business angel exemption”

The start position is that a director is not eligible for EIS because they are “connected” to the company by employment.

There’s an exemption for:

  1. existing directors that are not receiving a salary;
  2. new directors who were not involved with the business before they invested.

This post deals with scenario 2.

The exemption is in place because HMRC recognises there can be value in a new investor supporting the business with advice – and perhaps more formally as a director.

For the exemption to apply and for an investment by a new director to be eligible for EIS, at the time the shares are issued, the new investor must not have been “connected” with the company nor involved in anyway in carrying on the company’s trade.

This means the appointment as director should happen after the shares have been issued.

The usual circumstances are where an investor meets a founder and wants to invest in their company.  And, either the founder wants the investor to be appointed as a director or of course, the investor requires it as a condition of the investment.

 

Posted in EIS

When did your company “start trading” for the purposes of SEIS and EIS

When your company started to trade is important, as it can start the clock ticking for SEIS and EIS deadlines.

It is not necessarily the date you incorporated your company (the date at Companies House) or the date you made your first sale.

The date you started to trade is the date you were ready to start selling your products or services and were actively seeking customers, whether or not you had any.

To take a simple example of a corner shop. The business starts to trade when the shelves are stocked with products and the “open sign” is turned round on door – even if no one comes in and buys anything.

Check your trade is a qualifying trade for SEIS and EIS.

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