HMRC

SEIS / EIS Advance Assurance: Don’t forget..

Don’t forget that you need the names and addresses of prospective investors when applying to HMRC for advance assurance that your company is a qualifying company for the purposes of issuing shares under EIS or SEIS.

Many founders are still unaware and can end up wasting valuable time as HMRC will reject the application immediately.

The problem for many entrepreneurs is that it’s a bit of a ‘chicken and egg’ situation – the investors will normally only express interest once the company has secured advance assurance from HMRC that it qualifies…

Per HMRC’s guidance:

If you’re applying for EIS or SEIS and your company:
– is raising money directly from investors: you must provide the name and address of any prospective investors
– is listed on the Alternative Investment Market (AIM) – you do not need to provide investor information
– plans to list on AIM – you must provide the name and registration number of the nominated adviser that supports its listing
– seeks investment through a fund manager or business promoter – you must provide evidence that they’ve agreed to act on your behalf and will continue to work with you
– seeks investment through a crowdfunding platform – you must provide evidence that they’ve accepted your proposal and will continue to work with you

https://www.gov.uk/guidance/venture-capital-schemes-apply-for-advance-assurance

Launching our new course on the HMRC SEIS / EIS advance assurance

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 KitIt 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.

Not just SEIS has trading timelimits – EIS does too!

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

Source HMRC

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.

How to claim enhanced Research and Development (R&D) Tax Relief?

The UK Research and Development (R&D) Tax Relief Scheme is delivered via HMRC’s corporation tax filing system.

After each financial accounting period, a company is required to prepare statutory accounts along with a corporation tax computation.

The corporation tax computation calculates the tax liability of the company for the period (if profitable) based on the statutory accounts. If pre-revenue and / or in development mode then the corporation tax computation will calculate the company’s losses for the period.

The R&D tax claim figure is entered into the corporation tax computation and CT600 corporation tax return to claim the notional enhanced R&D tax deduction.

The corporation tax return and supporting computation is filed online with HMRC. It is recommended that the company also prepares a report outlining the nature of the R&D work and why / how it satisfies the HMRC definition of qualifying R&D plus detailed supporting claim calculations – or you could get an R&D tax specialist to help :)

If profitable, this will result in a reduction in the corporation tax payable.

If loss-making, the company can elect to surrender the enhanced tax loss for a tax credit payment from HMRC. Or it could elect to carry the enhanced tax loss back twelve months (if profitable) or carry forward to utilise in future periods.

HMRC aims for a 28 day turnaround time in reviewing and processing R&D tax claims.

If you would like to learn more, why not subscribe for our R&D Tax Relief Training Course:

GF011 – What is SEIS / EIS HMRC advance assurance and how do I get it?

Get Funded! podcast covering SEIS and EIS

In this episode of the Get Funded! podcast we cover the all important:

HMRC SEIS / EIS advance assurance procedure

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.

Please subscribe at iTunes to ensure that you can pick up past and future episodes. Also, we’d be thrilled if you could leave a review on iTunes.

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GF009 – What does trading mean for SEIS and is my trade new?

Get Funded! podcast covering SEIS and EIS

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.

R&D Tax Credits: How the new HMRC 14.5% cash credit works

I’ve been getting some questions about the new 14.5% R&D tax credit rate announced in the March 2014 Budget Statement and how it works in practise.

So here’s a short video outlining how the effective rate of cash receivable from HMRC increases from 24.75% to 33% on qualifying spend – that’s one third of your R&D expenditure effectively being funded by the Government! 

Plus how it could result in approx £8,000 of additional cash in your bank account for each £100,000 of qualifying spend if your SME is loss-making during its R&D phase.

Please leave your comments or feedback below or get in touch.

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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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HMRC R&D Tax Credits: How hard is it to file a claim?

HMRC R&D Tax Credits - How to file a claimSo you’ve had a good look at the activities of your company and think you might have a qualifying claim for Research and Development (R&D) Tax Credits – but what next?

HMRC R&D tax credits can be successfully claimed by UK companies across all industry sectors – from builders to engineers to manufacturers to technology firms to, of course, R&D companies.

There are 4 key steps to making a successful claim for HMRC R&D tax credits:

1. Prepare a short report that outlines the nature of the qualifying R&D activities for UK tax purposes

Firstly, breakdown the project(s) work carried out in your company over the past two years into potential qualifying and non-qualifying projects.

Consider which projects you feel pushed the boundaries of knowledge in your field. For example, you may have found yourself at point A and wanted to get to point B in terms of product or service delivery but had no idea how to get there? You therefore incurred time and costs on competent professionals in your sector seeking to find potential solutions. You may have hit roadblocks along the way?

If so, these can all be pointers towards potentially qualifying R&D activities for tax…

You should aim to build your supporting R&D report around 4 key headings:

  1. What is the science or technological advance sought?
  2. What were the scientific or technological uncertainties involved in the project?
  3. How and when were the uncertainties actually overcome?
  4. Why was the knowledge being sought not readily deducible by a competent professional in your field?

HMRC deals with R&D tax credit claims via its specialist R&D Units – I have to say the team that work at these offices are amongst the most helpful and pragmatic of all the HMRC departments (praise indeed!). Your report will be sent to  your closest R&D Unit.

2. Quantify your R&D tax qualifying costs

Qualifying costs for R&D tax purposes fall within 3 main categories:

  1. Emoluments paid to staff engaged in the qualifying R&D (this covers salary, employer’s NIC and employer’s pension costs). Make a table (say in excel) of all the staff engaged in R&D and their total emoluments for the year. Then apply a percentage based on the number of days they were directly engaged in the R&D v their total working days. Ideally your team keep timesheets but if not, an estimate based on diaries etc will suffice. Total these costs up and this will likely form the bulk of your claim.
  2. Subcontractors / Externally provided workers – These are third parties that you subcontracted elements of the R&D work to or workers provided by staff provider companies e.g. agencies, in the latter case. These relationships can sometimes be quite tricky to classify for HMRC R&D tax credits purposes and the paperwork will often be key.
  3. Software / Consumables can also be included in a claim. These will typically be bits of off-the-shelf software that you had to buy to use within the R&D process (e.g. licences) or bits of consumable kit or parts if you are developing physical products or prototypes. Really anything that is used up as part of the process or discarded. Any capital expenditure e.g. on PCs bought for the process, are not likely to be consumables for these purposes; rather these would attract 100% tax write off under the R&D scheme. Power and water costs can also be claimed. Ideally you would have a section of the building that you dedicate to the R&D activities so that you can section off the floorspace to calculate a proportion of the total power and water costs. Otherwise you would need to consider some other means of pro-rata allocation, perhaps based on the number of qualifying employees.

The total of the above costs will form the basis for your claim.

3. Apply the R&D tax uplift or enhancement to the total of the costs to calculate your R&D claim.

The enhancements set out below apply for UK SMEs which will cover the majority of readers of this site as the thresholds for R&D are huge (less than 500 employees and either turnover of less than €100m or a balance sheet total of less than €86m).

From 1 April 2011, the enhancement is 200% (it was 175% in the year up to 1 April 2011).

From 1 April 2012, the enhancement is 225%!

[Update: From 1 April 2015, the enhancement is 230%!!!]

So say your total qualifying costs (from points 1-3 above) in your financial accounting period ended 31 March 2012 are £234,235, then under this R&D tax incentive you will receive an additional £234,235 deduction against your taxable profits for the year (for company corporation tax purposes only).

Taking this a step further, say your profits adjusted before tax (but pre R&D uplift) are £125,000, then this additional R&D adjustment will turn an otherwise likely corporation tax bill of £25,000 into a tax loss of £109,235. Not only does this eliminate the £25k tax bill but it potentially results in a tax refund from HMRC of £13,654! (any refund is capped by the PAYE paid by the company, although this rule falls away from 1 April 2012)

Now you can hopefully see the value of investing some time to pull together an R&D tax credit claim!

If your financial accounting period straddles the 1 April change of rates (say a 31 December year end) then you need to apportion expenditure pre and post this date.

You can go back to accounting periods ended in the past two years to make or amend claims so its not too late to revisit and amend previously filed corporation tax returns.

4. How to file the R&D tax credits claim with HMRC

The R&D tax credit claim is included in your corporation tax return for the relevant accounting period. Corporation tax returns are filed online. Your report is sent to the relevant R&D Unit after filing the return online.

There is some work to be done before the claim is filed to determine the optimum treatment of the R&D claim for your specific circumstances. For example, rather than reclaim the cash tax credit, it may work better for you to carry a resulting loss back to the previous profitable accounting period or carry forward to future periods if you expect to return to profitability quickly.

This is especially important because the R&D tax credit repayment option gives you a discounted return than if you held out and offset the enhanced deduction against future or past profits at your full corporation tax rate. Even though the enhanced deduction increases to 125% from 1 April 2012, the repayment position does not improve. Watch out for this!

You can attempt to make a claim yourself or you could try using HMRC’s new R&D pilot programme although you may find you will achieve a better result by seeking some professional help from R&D tax credits specialists.

Either way, I hope the above is helpful and we see more R&D claims being filed by UK companies!

11 essential action points after starting your company

Better to be a disciplined entrepreneur from day one. Here is a checklist of 11 tips how:

  1. Get your company incorporation certificate, Memorandum & Articles of Association downloaded and on file. Plus a shareholders agreement if you have one. This will form the basis of your statutory books which you must maintain for any changes in shareholders, directors etc going forward.
  2. Complete and file Form CT41G with HM Revenue & Customs to register your company for corporation tax purposes and to get your employer payroll package ordered and registered with HMRC (or refer to point 11).
  3. Get the relevant documents (in point 1) plus your passport and a recent utility bill together ready to set up a business bank account (get used to pulling together these personal docs for routine money laundering checks for pretty much all financial services).
  4. Set up an A4 lever-arched file ready to collate all of your paper invoices received for amounts payable. Put a divider in the file to separate paid invoices (behind the divider) from the unpaid invoices (in front of the divider). Start numbering the invoices received sequentially to (ideally) match your online accounting software (see point 6).
  5. Decide whether it is right for your company to register for VAT (or refer to point 11).
  6. Choose a decent accounting package so that you can get all of your financial affairs including invoicing etc set up ready. I like Xero.
  7. Check your founder(s) shareholding allocation now e.g. if there are any shares to be allocated to key (present or known future) management / employees do it now or asap before the value in the business (and therefore shares) increases. If you delay you could store up some nasty capital gains tax, income tax and national insurance liabilities for the future…
  8. Get all your ducks in a row with regard to all industry certification and insurance requirements for your particular sector. Would be embarrassing and unprofessional to get this wrong.
  9. Think now about protecting your crown jewels. Is there any intellectual property, trademarks or patents that need filing, protecting or transferring before you launch your BIG idea or go head-to-head with the competition?
  10. Go get yourself a natty logo, stationery and website. Remember to include your company name, address, registered company number and VAT (if applicable) on your documentation. Get business cards too. Register your Twitter account. Start a blog. Tell the world.
  11. Get yourself a supportive accountant and tax adviser who understands your niche :)

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