For those without an army of lawyers and accountants on retainer, methods for saving tax are in short supply. So it is no surprise that the Enterprise Investment Scheme (EIS) and its younger Seed variant (SEIS), which both offer considerable tax savings, continue to be popular with individuals seeking alternative forms of medium-to-long-term investment.
A knock-on effect of this popularity is that start-ups and young companies looking to raise funds by offering equity are, in effect, required to do so via the EIS/SEIS. Otherwise, they may risk finding it more difficult to attract investors, who will have no shortage of other companies to give their money to instead.
Many companies that seek investment through these schemes will either be spending money faster than they’re earning it or not earning any at all. Therefore, the sooner they can receive approval from HMRC to issue qualifying shares, the sooner they can receive cash from investors in order to continue growing their business. Any delays to receiving the approval can be costly, particularly if investment commitments are withdrawn as a result.
If you are submitting an application then there are a number of measures you can take that, while not particularly complicated, can go a long way to ensuring it is processed and hopefully approved without delay. Note that these tips are written with those applying for advance assurance in mind - which we strongly recommend every company does first - but they should be applicable if the company has already issued shares and is applying afterwards.
Delays are often the result of insufficient information being provided with the application such that the tax inspector reviewing it is not able to fully assess the company against the various qualifying conditions. It is therefore important to provide not only as much information as possible with the application but also the right information.
The key to providing the right information is knowing which qualifying conditions HMRC pays the most attention to. Whether the company’s trading activity is a qualifying activity or not is one such example. Explaining the trade in detail will usually suffice, but if it is similar to an excluded activity then extra care should be taken to highlight how it is different.
Another condition that HMRC assesses very closely is that the money raised from the EIS or SEIS must be for the company’s organic growth and development. While a breakdown of how the money will be spent can be sufficient to allow the inspector to test this condition, it is recommended that you include an additional summary that explains how the different categories of spending will achieve growth and development for the company. The legislation doesn’t define growth and development but HMRC does provide examples of indicators that the company has grown.
The ‘risk to capital’ condition that was introduced in the Finance Act 2018 is another example that will be subject to special scrutiny. To test for this, the inspector will assess whether the company intends to grow and develop its trade in the long term and if there is a significant risk of the investor incurring a capital loss that exceeds their net investment return. Of the standard documents requested with the application, it is the business plan or investor prospectus that is likely to contain the information that the inspector will need to assess this condition. If it doesn’t then an additional report should be prepared that directly addresses these requirements.
The common theme with all of the above is to ask yourself if the information in your application would allow an outsider with no knowledge of the company to determine that each of the conditions are met. If you can’t answer yes then don’t be afraid to provide additional documents beyond those that the form explicitly asks for, even if it is just a page of text.
In order to tie the whole application together, it is beneficial to include a cover letter. Firstly, the cover letter can be used to summarise the company’s trading activity, the amount of money it is raising and how that money will be spent. It can then be used to list what documents are included with the application and, perhaps more importantly, what documents have not been included and why; if you have not included some requested documents, be sure to provide a reason for this. Lastly, if there are any unusual features of a specific application then the cover letter is the perfect place to address them. For example, if multiple share issues are covered by the same application then the timings of all the issues should be listed and explained if necessary.
And last but not least, be sure to complete the application form exactly as prescribed. This may seem obvious, but it is easy to miss some of the small print, and you don’t want that to be the reason your application is delayed by upwards of a month.