Watch this short video as we walk you through the key points in preparing and filing an advance assurance application to HMRC under the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS).
The SEIS/EIS Advance Assurance application process allows companies that are contemplating equity/share-based funding to seek clearance from HM Revenue & Customs ('HMRC') that they are a qualifying company under these valuable tax incentives prior to raising the funding.
Our aim is to provide a comprehensive overview for entrepreneurs and founders on how to apply for SEIS EIS HMRC advance assurance.
What are the SEIS / EIS tax incentives?
Let's kick off with a brief refresher on the benefits of the SEIS and EIS government tax incentives from both a company and investor perspective.
Firstly, it is worth noting that they are UK government tax incentives so fully supported and endorsed by HMRC.
From an investor perspective, the key tax benefits are:
50% income tax relief under SEIS and 30% income tax relief under EIS. Put another way, this means that a £100,000 investment under SEIS would allow the investor to claim half of the cash back (50%) as a refund of income tax already paid. The same principle applies for EIS except it would be £30,000 based on a £100,000 investment
The investor will be able to sell their shares with no capital gains tax to pay after three years. This is a better capital gains tax result than the Founders will receive!
The investment cash will fall outside the investor's estate for inheritance tax purposes after two years
If the company fails, the investor should be able to offset a significant proportion of their investment against income tax
Under SEIS, there is the added bonus of a CGT reinvestment relief that allows 50% of a chargeable gain to be extinguished
The qualifying investors will typically claim the tax relief via their self assessment tax return for the current tax year or prior tax year (on receipt of a formal HMRC compliance statement certificate - see further below).
How does SEIS/EIS work?
A key concept to grasp is that both SEIS and EIS are designed to help encourage investors to invest cash into early stage and high risk growth companies in return for shares in the investee company.
It must be a cash investment for a new issue of ordinary shares.
This means that a sale of some of your existing shareholding will not qualify. Also, importantly, loans do not qualify - including debt-to-equity conversions.
The Seed Enterprise Investment Scheme (SEIS) is for early-stage companies i.e. those companies that have been trading for less than two years (note that it is the trading date that is important rather than the date of incorporation).
Companies can raise up to £150,000 under SEIS. Investors receive 50% income tax relief on the amount they invest and a capital gains tax-free exit. So it’s a fantastic result for the investor.
All UK individuals have a £100,000 annual SEIS investment allowance.
The Enterprise Investment Scheme (EIS) is for growth companies, typically less than seven years old and they can raise up to £5 million per year under current rules.
All UK individuals have a £1m annual EIS investment allowance.
EIS investors, in this case, can claim 30% income tax relief and also get a CGT free exit. But you can see it is a lower income tax relief under EIS compared to under SEIS.
In both SEIS and EIS, the investee company must carry out a qualifying trade. HMRC has a list of excluded activities (such as investment property development, financial services etc) that you must check to ensure that your planned business activities are not precluded.
What is the HMRC advance assurance process for SEIS and EIS?
Given how valuable these tax reliefs can be for investors (and in attracting potential investors), the tax rules are quite complex and restrictive in certain areas.
Fortunately, there is a formal HMRC advance assurance service that allows you, as a company founder, to approach HMRC to seek pre-approval. HMRC will consider your case from their specialist HMRC Venture Capital unit and based on the information provided, confirm whether your company is a qualifying company under SEIS and/or the EIS relief.
Note the term “advance” assurance. The key idea is that you seek approval before you go ahead and receive the funding and issue the shares to the investors under either relief.
HMRC will consider your application and either grant assurance i.e. agree that you satisfy the requirements, or they will reject it. Unfortunately, there is no formal appeal process if they do reject it, but we’ll cover that further below.