A really common question, so I thought I’d throw up a quick tutorial to share the answer.
Hope this helps!
(This course might help too :))
Delighted to have launched our new online step by step guide to preparing and filing an Advance Assurance Application to HMRC that your company qualifies under SEIS and / or EIS!
Really brought about by popular demand and to fill a gap where some companies simply don’t have the budget to take on a professional firm to carry out the preparation work and specific advice on advance assurance applications (although I am afraid this can never be a substitute for this).
The course has been called: The SEIS / EIS Advance Assurance DIY Kit. It is really aimed at founders / entrepreneurs to give them a bit of a helping hand. The hope is that for 90% of applications, this might be enough and will therefore result in huge cost and time-savings all round.
As well as a 40 min run through the form and how to complete it, we’ve also chucked in a template of a letter that we use to supplement the standard (limited!) EIS/SEISAA Form. You can use this for your application too.
Some links to further resources rounds off what is hopefully a useful addition to the startup community.
You can access this new online tutorial course on completing your SEIS / EIS advance assurance form here.
So you have managed to secure advance assurance from HMRC that your company is a qualifying company for the purposes of raising funding under Seed EIS and / or EIS. Congratulations!
You may now be the one of many Founders who fall into the "What now?" mode of thinking...
This perfectly understandable as the journey is just beginning for you and your company under the strict (yet often complex) requirements of the SEIS and EIS tax rules
Here we share some tips that you might like to take into account as you seek to issue shares to your business angels in return for this tax advantaged funding:
Understand your obligations to your investors. Take professional advice particularly in relation to your offer document and any shareholders agreement. It is fresh issues of shares only that qualify under SEIS & EIS. Also, remember your obligations extend for at least three years beyond the issue of the SEIS / EIS shares to your investors
No Founder should be without a detailed spreadsheet share cap table with each step mapped out from the Founder (subscriber) share issues and then for each round thereafter (SEIS, EIS and onwards). This allows the Founder to keep track of respective valuations, % shareholdings, notional options pools and to observe dilutions at each stage
That order ONLY. So if you are planning on fundraising for both (and you have advance assurance for both) ensure that you allow at least ONE day to pass between the issue of the SEIS shares and the EIS shares thereafter
A ‘nice to have’ problem that many Founders would be envious of (!) but make sure that any share subscriptions from investors do not breach the ‘gross assets’ test at the time of the share issue. More likely to be a problem under SEIS with its lower £200k gross assets limit
This is where your nifty spreadsheet will come into play. Make sure that % shareholdings are shown and that no SEIS / EIS investors ever exceed 30%. Watch out for “associates” whose shareholdings will be aggregated e.g. spouses, parents, grand- parents, children, grand-children (brothers & sisters are okay)
Rather than settle for just 5 tips, we thought we would round it up to 10 and deliver it in a downloadable one-page PDF. You can access it for free by following the link below
Note that this article was originally posted at ip tax solutions
I know it’s not cool to aim for being ‘ordinary’ and its not a label that you’ll want attached to your business but when it comes to your SEIS / EIS shares this is exactly the label you want – ordinary shares.
SEIS / EIS shares must be ordinary non-redeemable shares and carry no preferential rights to dividends or assets on a winding-up.
If you have institutional or other non SEIS / EIS investors then things can become more complex, if they say want preferential rights in relation to certain aspects of the business.
In this scenario, differing share classes would typically come into play with say ‘A’ shares for the founders, ‘B’ shares for VCs (both classes may have some preferential rights to varying degrees) and ‘C’ shares for SEIS / EIS investors – these being the ‘highest risk’ ordinary shares.
No one-size fits all but this gives you an idea. If you are going to go down the road of different share classes then bear in mind that this will require formal legal procedures to give effect plus amendments to the Articles of Association of the company (this goes beyond the scope of this course – get yourself a decent lawyer!).
This is a just one of a series of emails from our SEIS / EIS course – you can subscribe to the course below:
Judging by the rapid uptake in the number of calls and enquiries we are receiving on a weekly basis from entrepreneurs and founders looking to ensure that their company is SEIS / EIS tax ready – I think it is fair to say that SEIS / EIS tax benefits are now getting the attention they deserve!
So if you are a star company looking for rapid growth and you’re in search of investment, then you really need to get up to speed with the tax benefits that SEIS / EIS government tax incentives can potentially bring you.
I’m afraid to say that it can be quite complex in parts – good news is that we’ve set up an email course to help you swot up!
You can access it here:
The requirement for a company to have a ‘new qualifying trade’ (i.e. trading for less than two years) in order to qualify under SEIS is now fairly well trodden ground.
Less well trodden is the new requirement for EIS qualifying companies to have commenced trading (had first commercial sale) within the past seven years (there is an extension to 10 years for knowledge intensive companies). This applies to EIS shares issued from 18 November 2015.
There are various potential exclusions to this rule, but particularly pernicious are the rules related to groups – what about this for an example:
Company E was incorporated on 1 February 2016. It used private investments to acquire the issued share capital of company F on 1 March 2016.
Company F was incorporated on 1 February 2014 to trade as a brewery. Its first commercial sale was made on 1 June 2014. On 1 March 2015 company F acquired a pub which had started to trade on 1 April 2005.
Company E’s first commercial sale was therefore on 1 April 2005 and it does not meet the basic age condition
Seems fairly tenuous and serves to show just how careful companies will need to be in carrying out their due diligence regarding their qualifying status under EIS prior to issuing shares.
It might be useful to revisit one crucial factor in planning for SEIS / EIS:
The issue of new ordinary shares in exchange for a cash investment.
Then day-to-day reality steps in….
The shares are issued before the cash has cleared – oops!
The shares are issued way after the cash has cleared – oops!
HMRC could contend that in the first case the cash could never have been for the shares as they were issued before the cash cleared (two unrelated transactions, in their eyes) and in the latter case that it was a loan conversion – neither qualify.
What’s the solution?
Arrange so that the shares are issued on the same day as the cash clears in the company bank account. There can then be little argument over what the cash was for.
Simple; rarely easy!
This post is a sample from our SEIS / EIS training course that you can access by subscribing below:
We are delighted to launch our new SEIS / EIS training course. This free course will be delivered via email in a series of bite-sized chunks.
Aimed at company founders seeking SEIS and / or EIS investment, the course should prove to be an excellent primer in helping entrepreneurs educate themselves on how they can make the most of the generous opportunities offered by these government tax incentives – whilst steering clear of some of the pitfalls!
Business angels (both budding and existing!) could also benefit from this course as it sets out in plain English how the schemes operate and points to watch out based on practical experience of working with these schemes on a daily basis.
We hope you find benefit in this course and look forward to your feedback.
Sign up via the form below to get started immediately:
There’s been a recent sorry tale of an EIS investor who invested £50k for shares in a qualifying company under EIS. All seemingly went well and he sold his shares for – what he thought would be – a CGT free disposal.
But there was a problem…
He had failed to make a claim for income tax relief on his investment which is a requirement of the EIS relief – his reasoning was that he had little, if any, taxable income in the relevant period. He was denied the opportunity to file a late claim for income tax relief so his case was dismissed – with a full CGT liability…
So the moral of the story for EIS investors is to make a claim for income tax relief on investments even if the income tax saving might appear pitiful – because the CGT saving might not be ;)