Accessing Funding

Claim EIS income tax relief if you want a CGT free disposal

Should have claimed EIS income tax reliefThere’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 ;)

Raising SEIS / EIS funding for a software company? Watch out!

969088410_0597019e20_mImagine you are setting up a software development company. Perhaps you plan on generating revenues using a Software as a Service (‘SaaS’) business model: charging users a licence fee to access the service via the cloud.

You need funding and are considering the benefits of Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS) to help attract funding for your tech startup. It is always good practice to seek advance approval from HM Revenue & Customs that your company is a qualifying company for the purposes of raising money under either or both of these UK Government tax incentives.

One of the key points to consider as part of this advance planning process is whether your company will be carrying out a qualifying trade for the purposes of these tax reliefs? This is not always so obvious – software companies being a case in point.

Note that the trade of ‘receiving licence or royalty fee’ income is of itself an excluded activity i.e. does not qualify, under either scheme. However, there is an exemption from this restriction where the company creates the whole, or greater part, of the underlying intellectual property that goes on to generate the licence or royalty income. Cue – breathe a huge sigh of relief!

Matters are not so straightforward, however, in situations where intellectual property is acquired from another company and that transferor company has already monetised the IP and received licence fee income in relation to it. At what stage will you have created the whole (doubtful) or greater part of the underlying IP and so qualify for SEIS / EIS?

* I should clarify that the above considerations are not exclusive to software companies – it is simply the most common scenario that I have encountered in practice.

Share Equity: Once it’s gone, it’s gone

Equity Sometimes there is little alternative but to issue shares to investors, employees and other stakeholders. If the company’s an early stage company then it has little else to ‘sweat’ to release some cash.

You might be able to benefit from the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) but – although technically related to your company – it is the investor that pockets the tax relief (not you). You might be able to squeeze some more cash out of the investors by virtue of the tax relief they will receive but (as the rules currently stand) you have to issue shares to them in return for their investment.

Whilst money for salaries is tight, employees may benefit from an approved share option scheme like the Enterprise Management Incentive Scheme (EMI). Although they only hold a piece of paper entitling them to the shares at some point in the future (say on an exit), you must still take into account the post dilution shareholdings once their shares are issued.

So you started with 100% of the company and very quickly you might find that your shareholding is down to not much over 50%. And then there’s that big VC round you’re contemplating in a year or so – further dilution to come…..

There is only ever 100% to divide up. For each 1% that goes it has gone (probably) for ever. Often it is a price worth paying as the old saying goes,

“its better to have 40% of a successful large pie than 100% of a failing tiddler”

But at every stage you should try to ensure that you have explored incentives that do not require you to part with your equity in your company. 

So you could look at R&D tax credits and grants. Also, further down the line the Patent Box could shave some much needed cash off your corporation tax bill.  These Government tax incentives and grants do not require you to give up any of your shares in return for the cash and so could allow you to get further down the line to achieving your milestones with no further decrease in your shareholding.

Often in practice, companies have little alternative but to push through with investment for shares in the company but its always useful to remember that there are other (non-equity) funding avenues available.

Image: Creative Commons License Richard Potts via Compfight

5 Tips on Applying for SEIS / EIS HMRC Advance Assurance

Having prepared and filed too many to mention (!), here are a 5 tips on applying for SEIS / EIS HMRC advance assurance:

1. Don’t leave it too late! HM Revenue & Customs (HMRC) are generally pretty good in turning around applications within 30 days but it can peak to 6 weeks around key tax deadlines e.g. 31 Jan self assessment tax return filing date and 5 April end of personal tax year.

2. Use the form that HMRC provide for you but you may wish to accompany the form with a covering letter, as there’s not much room to disclose any additional matters that might be relevant. Don’t forget, this is a tax clearance document and therefore, HMRC will reserve the right to withdraw an approval if it later transpires that you didn’t disclose all of the facts. You have been warned!

3. The advance assurance application process is not mandatory but is well advised for two principal reasons: i) most investors will insist on evidence of HMRC approval for their own peace of mind before parting with their investment cheque [update: it is now a requirement that you include the names and addresses of prospective investors in your application]. ii) it gets you onto HMRC’s radar for the second stage which is to complete and file forms SEIS1 / EIS1 which is necessary for the investors to be able to claim the tax relief. If you haven’t applied for advance assurance, HMRC generally ask all of the sorts of questions that would have been covered in the advance assurance application in any case.

4. If you foresee that you will be seeking to raise both EIS cash after a SEIS round then apply for both within a single advance assurance application. [Update: the most recent version of the HMRC form now more easily allows for the two boxes to be ticked}

5. Take care if you are a software company and will be generating revenues from licence fee income (as most will). You will be relying on a carve-out from an otherwise non-qualifying ‘excluded activity’ – in receiving royalty or licence fee income – which states that you can qualify as a SEIS / EIS company only if the whole, or greater part, of the underlying intellectual property that generates the revenues is created by your company.

I hope you find these tips useful. If you need more, you could subscribe for this free SEIS/EIS course (below) and/or you could reach out for specialist assistance here.

Can I raise funding under both the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS)?

The quick answer is YES – you can raise funding under both SEIS and EIS but there are some important points to watch including:

  1. If you wish to raise cash under both schemes, you must issue shares under SEIS before EIS. You can’t raise money and issue shares under EIS and then seek to raise money and issue under shares under SEIS after. It kinda makes sense but one to watch…
  2. You can only follow on with an issue of shares to investors under EIS once you’ve spent at least 70% of the SEIS cash (no sniggering at the back!). This can raise some practical difficulties as the SEIS investment limit for the company is capped at £150,000 so you don’t want to be back out on the investment trail too soon. It is possible to raise the SEIS and EIS money jointly but to take great care in the issue, timing and other matters related to the shares and investors. *******
  3. There are some other ‘funnies’ around timing of appointment to Director etc which can differ between the schemes among other things so you need to take care as you don’t want to jeopardise the EIS relief further down the line.

Drop me a line if you need any help either via the contact page or on Twitter (@stevelivingston) or via my specialist tax advisory firm, ip tax solutions.

******* Note that this 70% rule has been abolished for share issues post 5 April 2015

 

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What is the Seed Enterprise Investment Scheme (SEIS) Advance Assurance?

What is the seed enterprise investment scheme advance assurance video?

I am getting a lot of questions at the moment about the process for raising funding under Seed EIS and where the advance assurance fits in?

The Advance Assurance is a mechanism that allows companies to pre-qualify themselves with HM Revenue & Customs (HMRC) as a qualifying company for the purposes of raising funding under SEIS. It is not obligatory – although it is good practice. Most sophisticated investors will insist that the company has received advance assurance from HMRC of its qualifying status before investing as do many of the crowd-funding sites.

The other factor to take into account in deciding whether or not to seek advance assurance is that when you get to the stage of filing your SEIS compliance statement with HMRC (in order to secure the tax certification for the investors to allow them to claim their SEIS tax relief), if you haven’t already filed an advance assurance, the likelihood is that you will have to answer a series of questions from HMRC regarding the company’s qualifying status much like you would have completed at the time of the advance assurance – so you may as well have gone for it in any case and got yourself on HMRC’s radar as well as gaining comfort for the investors from the outset!

The process for seeking advance assurance is to use HMRC’s own SEIS advance assurance application form. If your facts are particularly complex or you would like assurance in relation to certain aspects then I tend to supplement the form with a letter to ensure that I have disclosed all of the relevant facts – so there is no come-back further down the line…

If you would like any assistance in relation to the Seed EIS advance assurance process then you can drop me a line here or at my specialist advisory firm, ip tax solutions.

 

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How to apply for advance assurance for SEIS / EIS

HOT OFF THE PRESS: We’ve just launched a brand new online course that shows you exactly how to complete and file your SEIS / EIS advance assurance application with HMRC. We walk you through every stage of filling out the form plus share some additional resources to help ensure a smoother passage through HMRC. Access it by clicking here. [Use the code: SEISAA2017 to get 50% off in January]

A short overview of how to apply for advance assurance from HM Revenue & Customs that your company is a qualifying company for the purposes of raising funding under the Seed Enterprise (SEIS) or Enterprise Investment Scheme (EIS). [Update – the form looks different now and is an online form – check out our course for the latest version (Jan 2017)]

You can find the SEIS / EIS advance assurance application form here.

The process normally takes 30 days for HM Revenue & Customs to issue advance assurance or revert back with any questions.

You can seek specialist professional SEIS / EIS assistance here.