The government is getting stricter with SEIS and EIS tax relief. Here are the changes you need to know about –
1. HMRC are no longer processing speculative applications
Due to the highly lucrative investment opportunity that is SEIS and EIS, start-ups were able to attract angel investors by obtaining Advance Assurance from HMRC which confirms that investment in the company would be eligible to receive tax relief. As a result of the popularity, HMRC found that processing applications was taking in excess of 8 weeks. More importantly, they found that despite the rise in applications, only a minority resulted in shares being issued.
As a result, as of this year (2018), HMRC will only process Advance Assurance applications where names and addresses of potential investors are provided. They may also request evidence of the potential investors such as letters which demonstrate engagement and interest.
2. There is now a new requirement – Risk to Capital
HMRC are cracking down on artificial investments. This is when investors are able to take advantage of the generous tax relief without having to truly put their money at risk. HMRC refers to this as “preservation of capital”.
To ensure that SEIS and EIS incentivises investments in genuine entrepreneurial companies, a new two-part test will be applied to applications: firstly, the company will need to demonstrate its intentions for future growth and development; and secondly, that there is real potential for loss of capital which is greater than the net investment return.
3. Overcome challenges with a concrete business plan
If you’re a start-up looking to find funding through SEIS or EIS, alarm bells may be ringing at this point. How are you meant to convince angel investors without Advance Assurance, and how do you get Advance Assurance without the names of interested investors?
In reality, it’s not such a conundrum. The solution lies in your business plan. This is now requested over a pitch deck or business overview from HMRC, which is a third change to the original SEIS/EIS application process.
Approach investors with a robust business plan to build confidence in your company. We would recommend including thorough research into the market and your competitors, in addition to well-calculated financial forecasts.
Your business plan will also help you demonstrate how you meet the requirements for risk to capital. You should ensure to include information on how you plan to grow your business, your objectives for growth (such as using the investment to hire new employees, or to produce more products to sell or to be able to ship globally etc.) and highlight areas where the investment is at risk.
Ridgefield Consulting specialises in SEIS and EIS. From providing the calculations for your business plan, to writing your application for Advance Assurance and setting up the shares for investors, we can provide a comprehensive service to support the growth of your venture. Visit our website www.ridgefieldconsulting.co.uk or call for a free introductory consultation on 01865 24 55 11.