In this edition of the Get Funded! podcast we cover some additional tips for film production companies that may be seeking advance assurance from HM Revenue & Customs that they are a qualifying company for the purposes of raising funding under SEIS / EIS.
Further info to enclose for SEIS or EIS film company HMRC advance assurance applications includes:
a description of the film company’s role in the production
the name of the film
how the company secured the production
what other parties may be involved e.g. co-producers, SPVs etc.
This podcast includes the following points with practical advice:
Why the advance assurance application is important?
How you apply for it?
Typical lead times?
What could go wrong?
Critical info to include?
As discussed in the podcast, the advance assurance procedure is not mandatory although it is highly recommended. This is your opportunity to get HMRC’s approval that your company is a qualifying company for the purposes of raising funding and issuing shares under SEIS / EIS. Most sophisticated investors will insist on evidence of a successful advance assurance application. This is your chance to flush out any uncertainties – don’t miss it! Listen to the podcast via the player below to learn more.
You can find the HMRC SEIS / EIS advance assurance online form mentioned in the podcast here.
Don’t forget that the typical turnaround time is 4-6 weeks for HMRC to respond to your advance assurance application. To avoid unnecessary delays, you would be well advised to get all your shareholder documents (including Articles with any revisions in contemplation of SEIS / EIS investors) finalised prior to filing the application. This is because HMRC will normally want to see the documents in as final form as possible. Otherwise you run the risk that HMRC will issue a ‘partial’ advance assurance in that they will ask for sight of the final version of (say) the Articles if further revisions are envisaged – so you would have to go through the process again. Tune into the podcast via the player below to learn more.
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In this episode of the Get Funded! podcast we cover the types of trades that qualify for funding under the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS).
We discuss the HMRC excluded activities list that you need to check to confirm that your proposed trade is not listed i.e. excluded. If not, then you should be okay.
There is a relaxation for these excluded activities to be included within your trade although it must not amount to a ‘substantial’ proportion of your overall trade. ‘Substantial’ for these purposes is deemed to amount to no more than 20%. The HMRC advance assurance procedure would be key in these circumstances.
We pay particular attention to the potential problem for software companies (particularly software-as-a-service (Saas) based companies) given that the receipt of royalties or licence fee income IS an excluded activity. There is a carve-out from this exclusion for companies that create the whole or greater part of the underlying asset that generates the licence or royalty fee income – most software companies rely on this exemption to qualify for SEIS / EIS – but there are some further traps for the unwary….
In this edition of the Get Funded! podcast we cover the thorny subjects of:
what “trading” means for the purposes of SEIS and
how this interplays with the definition of “Seed” in order to be eligible for Seed Enterprise Investment Relief?
We covered in a previous edition (subscribe via iTunes if you’ve not already!) the fact that you need to be undertaking a qualifying trade within your company if you wish to raise funding under SEIS / EIS but when is this deemed to start and why is it important?
We need to ascertain the starting point for any trade as this has important ramifications for eligibility under SEIS and it also plays into when form SEIS1 can be applied for and / or the timing of the use of the monies raised.
Frustratingly there is no definition of trading aside from the general observation that it would involve undertaking activities with a view to a profit. But what does this mean in practice?
I have discussed this with HMRC Inspectors and they tend to apply the useful anology of a new shop: whilst the new fittings are being installed and the stock is on order you would expect the sign on the front to say ‘closed’ (it is not yet trading). Once the shop is ready and the sign is turned to ‘open’ then trading has commenced.
So the question for your business is whether you are in a position to accept paying customers? This can get a little hazy for software startups, for example, applying lean startup principles and beta launches etc…
For SEIS purposes, a company must be carrying out a new qualifying trade. For these purposes the trade must be less than two years old. So you must apply the above principles to determine when your trade started. If you are using a company that was incorporated more than two years ago and there has been activity in the company within this timeframe that might point to a trade then this could cause problems. You would be well advised to seek advance assurance from HMRC and to explain the position to ensure that there are no problems. Likewise, if you are acquiring the trade from a third party company then you would need to ensure that it satisfied the two year rule.
When seeking the tax certificates for the investors this can be carried out after 70% of the monies raised has been spent or four months after the trade commenced – whichever is earlier. Again the above principles come into play.
Here in this edition of the Get Funded! podcast we cover the essential requirements related to your company and its eligibility for SEIS / EIS funding.
As you might expect for such a generous tax relief, it is not available to all companies – instead it is targeted at small – medium sized companies with the capacity for growth (along with a healthy dose of risk!).
The key company requirements for SEIS / EIS are as follows:
The company must be unquoted i.e. it must not be quoted on a recognised stock exchange. Note that the Alternative Investment Market (AIM) is okay for SEIS / EIS purposes as it is not counted by HMRC as a ‘recognised stock exchange’
The company must have a UK permanent establishment. Most companies will be incorporated in the UK so this isn’t normally an issue but this demonstrates that the rules are more flexible than some might appreciate – it could be an overseas company with a UK branch / permanent establishment and still qualify
For SEIS, the company must have gross assets of no more than £200,000 at the time of the issue of the shares – here we are concerned with total assets on the balance sheet only NOT net assets (ie after deducting liabilities). Where there are subsidiaries, these must be totalled up.
For EIS, the gross assets limit is £15m immediately before and £16m after the use.
For SEIS, the company must have fewer than 25 employees immediately before the relevant share issue
For EIS, the employee limit is 249.
The company must be carrying out a qualifying trade – the definition of what constitutes a ‘qualifying trade’ for SEIS / EIS purposes is deduced in reverse by reference to the ‘Excluded activities’ list – so if you’re not on it you should be okay! We’ll cover this in more detail in a future podcast as there are some potential traps here especially for software companies…
For SEIS, the company must not have received EIS or VCT monies.
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 ;)
Listen to an audio version of this Summary Budget 2015 round up of the key tax changes impacting on entrepreneurs or read the text version below:
An audio download link is available at the end of this post!
Reduction in Corporation tax
Continuing George Osborne’s pledge to make the UK one of the single most attractive places to do business in the G20 he continued with his downward pressure on the UK corporation tax rates. Not content with reducing the main rate to 20% from 28% not too many years ago, he pledged to reduce it further to 19% by 2017 and down to 18% by 2020.
Before we get too excited about the CT rate reductions, it was once again a “give and take budget” as Mr Osborne announced some far reaching changes to the dividend tax regime that will impact on many entrepreneurs and increases to the minimum wage – the now so called “Living Wage”.
Dividend tax changes
It has long been the case that entrepreneurs could extract profits from their companies as dividends rather than salary – the key advantage being NIC savings as dividends are not (currently) subject to NIC. The income tax suffered on dividends is lower than salary as dividends are only available from retained profits that have been subject to corporation tax – so a tax credit system is applied to dividends that, in essence, results in 0% income tax payable by basic rate tax-payers (so broadly up to £42,000 – £43,000); 25% of the net dividend payable for higher rate tax payers and 30.6% for additional rate tax payers.
Seemingly forgetting about the double taxation impact on dividend payments, the Chancellor announced that there will be a £5,000 dividend allowance from 6 April 2016 (whoop whoop!) and then a 7.5% additional tax applied to dividend income – so our rates now become basic rate: 7.5%; higher rate: 32.5% and additional rate: 38.1%.
Looking at the HMRC projected figures, they are looking to net quite a windfall on this change that is a tax grab via the back-door – I don’t think many entrepreneurs have quite grasped this change as it was positioned as a change that might impact on those with substantial quoted shareholdings and contractors.
Will we see larger dividend payments pre 5 April 2016 with founders leaving credit loan balances to draw down over the foreseeable future?
Employment allowance increase
We should see the £2,000 NIC allowance for employers increase to £3,000 from 6 April 2016
Annual investment allowance
The annual allowance for investment into capital equipment (e.g. PCs, servers, desks, chairs, machinery etc) was set to fall to £25,000 pa by the end of this year but this was increased and pegged at £200,000 for the next five years.
There were some further changes to EIS building on proposals from the Autumn Budget Statement that include proposals to cap the total amount that can be raised under EIS at £12m (£20m for ‘knowledge intensive’ companies).
Also, a new limit on companies raising EIS making it available only to those companies that have been trading for less than 7 years (10 years for knowledge intensive companies) – this change seems unreasonably harsh for longer more established companies that might want to access capital. The requirement for 70% of the SEIS cash to be invested before shares can be issued under EIS will also be removed as originally noted in the March 2015 Budget. Finally there was reference to ensuring that EIS funds are directed toward developing companies so there will be restrictions on using EIS monies for buyouts and acquisitions and more of a need to demonstrate that the funds are being employed to develop and grow trading companies.
There were no changes announced to the SEIS regime.
Many entrepreneurs will have diversified their risk with potentially one or more buy to let properties within their portfolio. These were also hit with some quite serious changes to the tax regime with the most hard hitting being the reduction in interest relief on buy to let mortgages being reduced to the basic rate of tax only. Currently, landlords can offset the mortgage interest at their marginal rate of tax (so potentially up to 45%). These new rules will be phased in to ease the pain of potential deleveraging for some landlords but the writing is on the wall for many – and who’s to say that this is the end with potential for 0% interest relief in the future….?
There will also be the removal of the 10% wear and tear allowance from 6 April 2016. Yet more pain for landlords.
On the downside, there were announcements that those with total income over £150,000 would be hit with reductions in the amounts they can put into their pension with the £40,000 annual allowance being tapered away with it hitting just £10,000 for those earning £210,000 or more. This is a admin headache all round and it comes into force from 6 April 2016.
On the plus side, there was a consultation announce to explore the best ways for pensions to be saved and a seemingly open approach to considering alternative finance in line with improvements to ISAs – this is great news for our thriving Fintech sector.
Inheritance tax changes
Long discussed and unsurprising was the pledge to increase the inheritance tax level to £1m to allow homes to be passed on without incurring IHT. Slightly odd in that the £325,000 nil rate band remains in place for the next 5 years but we have this additional £175,000 especially for the family home. Inflation may start to dig a hole into that £325,000 allowance rendering this less beneficial over time than the headlines suggest.
It was a shame that we didn’t see any changes to the VAT MOSS / (#VATmess) regime and I think the changes to dividends and pensions will add to uncertainty for many entrepreneurs and their advisors as the goalposts keep moving which is disappointing.
This is a thorny subject that comes up time and time again:
How much of the share capital can I or my investors own under SEIS / EIS?
In this seventh episode of the Get Funded! podcast we cover the (dreaded) “substantial interest” test that basically says that you can’t hold more than 30% of the issued share capital and qualify for SEIS / EIS.
I say “dreaded” because it is not just you or your investor that you need to consider but also any “associates” too. “Associates” include spouses plus parents, children, grand-parents etc (basically blood relations up and down). Brothers and sisters are not counted as “associates”.
Many startup companies get tripped up by this rule so watch out for it!
In this episode of the Get Funded! podcast we cover:
Getting your share capital right!
Not every type of share is eligible under SEIS / EIS and given the attractive tax benefits offered to investors, this is little surprise. SEIS /EIS investors cannot receive shares that have preferential rights. They must be – what we like to call –
“Full fat, full risk ordinary shares”
We also cover a couple of pointers to watch out for if you are raising money alongside VCs to ensure that the SEIS / EIS investors don’t lose out and how to avoid losing the relief by accident in the future….
In this fifth episode of the Get Funded! podcast, we cover an essential – but frequently overlooked – step that you simply MUST get in place before you raise money under SEIS.
So essential, in fact, that without it, you could mess up the SEIS relief for your investors before you’ve even really got started!
We also cover the maximum amount that you can raise under SEIS being £150,000 and the importance of getting the order right if raising cash under EIS too i.e. SEIS then EIS and not the other way around.
There are changes afoot around the interaction of these reliefs and the “70%” rule but this merits a separate episode – coming soon….! (Subscribe below ;) )