If your company qualifies for EIS/SEIS and you need investment, getting that qualification approved in advance by HMRC can make all the difference to your company, and secure investment fast.
The SEIS and EIS are UK tax reliefs designed to encourage investment by individuals in small unquoted trading companies carrying on a qualifying trade in the UK.
Since these companies are not listed on a stock exchange, they carry a high risk of loss of capital and low liquidity and may be difficult to sell or realise; the tax reliefs encourage investors by compensating them for the added risk
EIS gives the taxpayer upfront income tax relief of 30%, which can be carried back to the previous tax year. Up to £1 million can be invested each tax year, so the tax saving can be as much as £300,000 a tax year.
SEIS encourages investors to finance start-up growth-focussed companies, and gives the taxpayer upfront tax relief of 50% on a maximum investment of £150,000 a tax year.
Both EIS and SEIS require a minimum holding period of three years from the date of investment, after which the shares can be sold free of capital gains tax.
In the event of the investment failing, the resulting loss, net of the income tax relief claimed, can be offset against the investor’s taxable income. So after tax reliefs, the risk to capital could be as low as 27.5% for SEIS and 38.5% for EIS.
These generous incentive schemes should make it easier for companies to raise capital from individual investors, but a company that needs urgent investment may find savvy investors difficult to find.
One way you can reassure potential investors is to prove in advance that your company qualifies for SEIS/EIS.
To do this, you will need to apply to HMRC for advanced assurance.
The length of time HMRC take to process the application depends on the type of company and the quality of the application.
As a general rule you can expect an answer within four weeks, but that does not mean the advance assurance will be obtained then - it actually means HMRC will give an answer in four weeks but they may ask for clarification on a number of points.
You apply for advanced assurance directly from HMRC’s website by completing the (EIS-SEIS(AA)) form, which is designed to be filled in on screen.
To improve the chances of receiving assurance in four weeks the application needs to include:
Assembling and submitting a solid application is a lot of work, especially if you’re busy trying to raise funds while managing day to day business.
A weak application could generate queries from HMRC that could have been avoided, delaying approval and thus the influx of investment capital.
One way to avoid this is to hire professional advisors to assemble and submit the application. This will incur a cost, but that needs to be weighed against the time lost running the business and keeping it attractive for investors.
Your next step is to negotiate with potential investors.
A potential investor is generally limited to a maximum 30% equity in the business.
Many businesses will inflate financial projections, valuing the business much higher than potential investors, but any business is only worth as much as someone is prepared to invest, so you may need to give up more equity than you originally intended.
Once you have successfully negotiated terms with the investor, you can then apply to HMRC asking them to issue the EIS/SEIS certificates.
When these are issued - and again, an accurate application needs to be submitted to HMRC - the investor can make a claim for the tax reliefs.
Typically HMRC will take at least six weeks to authorise the issue of the SEIS/EIS certificates.
So now you have your investment, and the investors have their certificates, everything looks good.
But what happens if those financial projections are not met, and you start to run out of cash before your company has properly started trading?
Your recent investors already have 30% of the equity, so you can’t obtain further funds from them or they will lose their SEIS/EIS tax reliefs.
So the process begins again.
You need to look for further investment, possibly from new EIS investors, which will involve negotiating how much more equity you are going to pass to the new investor whilst diluting the equity stakes of the existing shareholders.
This again takes time, and distracts key people from operating the business.
The clear message here is to plan ahead.
Try and anticipate problems before they occur, so you are prepared and can deal with the challenges without too much distraction from running the business.
For more information, please speak with your usual Crowe advisor at an early stage - we are very experienced in dealing with all of these matters.