Enterprise Investment Scheme
SEIS / EIS: When it pays to be Ordinary!
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:
GF010 – What trades qualify for SEIS / EIS + potential problems for software (saas) companies!
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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….
Claim EIS income tax relief if you want 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 ;)
GF001 Get Funded! – What is SEIS?
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We are thrilled to announce the launch of a new podcast: “Get Funded!”
A podcast that aims to share practical information and tips on the workings of the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) with entrepreneurs, CEOs and founders.
I am afraid that there is little in terms of bells and whistles in terms of the podcast production at this stage (maybe that’ll come later ;) ), as we are more concerned with getting the information and tips out there as quickly as possible and exploring whether this might be a more digestable medium than text….
Let us know your comments and thoughts.
In this first “Get Funded!” podcast we cover:
- what is SEIS?
- who benefits from SEIS?
- which companies is SEIS aimed at?
- why is SEIS necessary?
This first podcast is really just an initial primer – we will aim to keep them as short and as easy to digest as possible.
EIS in a nutshell
It is never easy to summarise the ‘ins’ and ‘outs’ of the Enterprise Investment Scheme (EIS) but we’ve done our best with this EIS in a nutshell ‘one pager’.
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:
- 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…
- 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. *******
- 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
What is the Seed Enterprise Investment Scheme (SEIS) Advance Assurance?
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.
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.