EIS and SEIS: 7 pitfalls your business needs to avoid when you raise finance

Looking to raise angel money from backers utilising Enterprise Investment Scheme tax breaks? Avoid common mistakes and read this first...

haysmacintyre logo-resizeTwo hugely popular areas we advise our fast growth, entrepreneurial clients on are SEIS and EIS or to provide the full title the (Seed) Enterprise Investment Scheme.

The tax breaks provided to investors have helped make it possible for thousands of growing companies to raise finance.

But – and this is critical – the work doesn’t end in qualifying at the time of investment. There are a number of key areas companies like yours need to be aware of to ensure you do not lose this valuable relief for your investors once the money is in the bank.

Here are some of the pitfalls a you could face and solutions you need to know about when going for (S)EIS investment:

1. Watch out for delays in obtaining Advance Assurance!

Because of the uncertainties the investor faces when making an investment, HMRC allows a company like yours to seek Advance Assurance. Based on the intended trade and use of funds Advance Assurance is a pre-check that your company will qualify under the (S)EIS schemes.

As HMRC is currently taking up to two months to process an application for Advance Assurance it is recommended that assurance is sought as soon as you have made plans to receive an investment, even before approaching investors.

Assurance can be obtained for both EIS and SEIS investment and we recommend your business seeks both assurances at the same time. It is now possible, with careful structuring, to raise funds under the SEIS and EIS almost simultaneously rather than waiting for SEIS funds to be spent before seeking EIS investment.


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2. Don’t assume Advance Assurance is a guarantee that you’ll qualify!

Advance Assurance does not guarantee that the investments to be made in a company will definitely qualify for (S)EIS relief, only that on the basis of the facts provided to HMRC at the time of the application the company is likely to qualify.

Accordingly, if you’re going through the process, it is in your best interests to provide as much information as possible, especially if there is any uncertainty around whether your company’s trade or use of funds qualifies.

Information such as an investor memorandum and financial models can be useful for this purpose and should accompany the assurance application if already prepared or otherwise sent on once completed.

It may be the case that the form on the HMRC website does got give sufficient information for you to be able to provide the full facts. A covering letter should be prepared by you or your accountants to outline more precisely how your business intends to operate so as to give this necessary detail.

3. Look out for changes to legislation around EIS and SEIS!

Although Advance Assurance has no fixed expiry date, the legislation around EIS and SEIS is updated regularly and if there is a long delay between obtaining assurance and issuing the shares, it could be the case that your company’s circumstances mean it no longer qualifies.

For example, for shares issued after 18 November 2015 it must be the case that the funds used are for the ‘growth and development of the business’, which denies funds raised under EIS from being used for circumstances such as repaying loans previously made to the company or acquiring the trade and assets of another business to complement its own.

Because the legislation can change, some institutional investors will not invest under EIS if the assurance was granted a long time ago, e.g. more than 12 months. If this affects your company it may be prudent to request a new assurance from HMRC to confirm that the company still qualifies.

4. Don’t issue shares before you receive the cash!

HMRC has advised that the most common reason that investments fail to qualify is where the cash has been received by the company after the shares are issued.

This normally happens where shares are issued on the promise of the cash coming in or shares are subscribed for at the time of the company’s incorporation, before it has its own bank account with the money held by the directors personally.

5. Make sure you apply for the (S)EIS certificates in good time!

Advance Assurance does not guarantee the tax relief. Your company would still need to advise HMRC of the investments made on forms (S)EIS1 and once this is processed HMRC will send out blank (S)EIS 3 certificates for you to complete and pass to investors. An investor should not claim their tax relief on their tax return without the certificates.

HMRC can take up to two months to process the tax certificates and as (S)EIS relief can be carried back one year, often investors will want to get their certificates in advance of the 31 January tax return filing deadline. With this in mind you should apply for certificates as soon as you can and not wait until prompted by the investors.

6. Don’t let your qualifying status lapse post-investment!

Assurance is only given in relation to the company’s intentions in advance of the issue of shares. The company must continue to meet the requirements of the scheme for three years following the issue of the shares or, if later, three years from the date the trade commenced.

Certain circumstances may follow post investment (e.g. selling your business before the three years are up) which mean the company ceases to qualify and, should this happen, the directors must tell HMRC and there will be a claw-back of income tax relief from the investors, in many circumstances with interest.

Other examples of events that could impact on a company’s qualification include, a trade pivot or a relocation outside of the UK after the money comes in leaving the company with no UK presence.

The directors of the company cannot be compelled to take all steps to maintain investors’ EIS relief as they are required to act in the company’s best interests at all times. It may be possible that a decision in the company’s best interests, such as selling before the three year time limit is up, is detrimental to the EIS investors but not the rest of the shareholders.

7. Ultimately, don’t seek (S)EIS investment unless it’s right for your business!

Whilst being (S)EIS qualified can add to the attraction of a business to investors, in view of the above points it may be concluded that it is not right for your business if there is significant risk that the company will not qualify, or the restrictions on how the company has to trade after receiving assurance will inhibit how the directors see the company’s trade evolving in the future.

The key point is ensuring that not only is the company (S)EIS eligible at the point of investment, but that it is likely to continue to be for the three years post investment or post trade if later.

Paul Twydell is a corporate tax manager in the creative, media and technology team at haysmacintyre, accountants and tax advisors.

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