Investing Taxation

Is advanced assurance essential for receiving EIS tax benefits?

November 2, 2022
Is advanced assurance essential for receiving EIS tax benefits?

We take a look at the various venture capital schemes on offer in the UK and explain the process of advanced assurance. We then ask the question is advanced assurance essential for any of these schemes?

The government is keen on helping companies young companies to find the equity finance they need to grow. Since 1994 the government has introduced the Enterprise Investment Scheme (EIS). And more recently, in 2012, the UK government introduced the Seed Enterprise Investment Scheme (SEIS). Both schemes are government-backed investment programs for young, high-growth potential companies. The schemes give generous tax relief to investors who invest in these types of businesses.

SEIS and EIS benefits

Both schemes offer exceptional tax benefits. Investors receive income tax relief, loss relief, and tax-free returns. You can find out about the benefits of the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme by clicking the links provided.

The table below gives an overview of the key features of the three venture capital schemes on offer in the UK.

Annual investment limit£200,000£1,000,000£200,000
from April 2023
Income tax relief for investors30%30%50%
Minimum investment period5 years3 years3 years
Capital gain tax reliefNoneCGT deferralCGT Exception 50%
Tax free dividends?YesNoNo
Tax free capital gains?Yes – after 5 yearsYes – after 3 yearsYes – after 3 years
Tax relief for losses?NoYes – against gains or incomeYes – against gains or income
IHT business property relief?NoYes – after 2 yearsYes – after 2 years

Effectiveness of the EIS and SEIS schemes

Since 1994, these schemes have raised more than £25 billion for over 45,000 up and coming companiesThese schemes are a win-win for the three major stakeholders:

  1. Investors. All participating UK investors receive major tax breaks which make an investment more attractive as it reduces potential losses and increases potential gains.
  2. The Company. As investors are incentivised to invest, qualifying companies have an increased chance of raising equity finance to expand their business.
  3. The Economy. The scheme has been for over a quarter of a century for a reason. These schemes help create jobs and help in creating a more skilled workforce. This benefits the economy.

Advanced Assurance

To make the most of these venture capital schemes, businesses and investors should ensure they have something called Advance Assurance – because, without it, those tax breaks or investments may not be happening.  In later sections, we explain what advanced assurance is, and how it works.

What is Advanced Assurance for SEIS and EIS?

Investors seeking to invest in SEIS and EIS, need to know the company they are investing in is eligible for the scheme. If it’s not, they won’t get their tax breaks. Businesses can obtain proof of their eligibility for these schemes by seeking Advance Assurance from HMRC. (Advance assurance will not tell the company if an investor is eligible for SEIS).

Applications for Advanced Assurance can be filled out by a director or the company secretary.

Is Advance Assurance essential for SEIS or EIS?

Advance Assurance is not essential for SEIS or EIS. However, it can be a good idea to obtain it, just to give prospective investors peace of mind. Though it is recommended that businesses obtain this proof of eligibility before approaching investors for funding with either scheme.

Although HMRC will only provide a statement that says the investment is ‘likely’ to qualify for SEIS or EIS, (it’s not a cast-iron guarantee), it’s a strong indication that investments in the company will qualify for tax relief. Businesses and investors that enter into a SEIS or EIS agreement without Advance Assurance face the risk of HMRC later disqualifying the business from either scheme, leaving investors with zero tax breaks and the company with a problem.

How long does Advance Assurance last?

A company’s SEIS or EIS Advance Assurance from HMRC does not expire. However, changes to the company’s situation from the time of application to the point of share issuance may make their Advanced Assurance invalid. This is why companies must understand the rules in respect to making sure investors’ tax relief is not clawed back.

How does a company get Advanced Assurance?

A company need’s to apply for Advanced Assurance to get it. The first stage is for the company to go to the government site and register its details. They will need to select the most appropriate venture capital scheme. Each application should include

  • Details of how much the company hope’s to raise.
  • The business plan and financial forecasts.
  • A copy of the latest accounts if available.
  • Details of which companies will use the investments and what the funds will be used for.
  • Information on all trading and activities to be carried out.
  • A list of the amounts, dates, and venture capital schemes under which the company has previously received an investment.
  • Up to date copy of the memorandum and articles of association, including the details of any changes you expect to make.
  • The latest draft of any documents you use to explain your proposal to potential investors.
  • A copy of the register of members from the date you apply for advance assurance.
  • Details of any other agreements between the company and the shareholders or VCT.
  • Any other documents to show you meet the qualifying conditions for the scheme.
  • A signed letter from one of your directors or trustees if you’re allowing an agent to act on your behalf.

Advance Assurance for R&D

Some companies qualify for Research & Development tax relief. these benefits include:

  • The ability to deduct an extra 130% of their qualifying R&D costs from their yearly profit, as well as the normal 100% deduction, to make a total 230% deduction.
  • The ability to claim a tax credit if the company is loss making, worth up to 14.5% of the surrenderable loss.

To claim the relief the business must be an SME and show how their project meets the Government’s definition of R&D. Companies who are making their first R&D claim can qualify for Advance Assurance to ensure their R&D activities qualify for this tax break. Companies can find more information about this relief in the Government’s ‘Making R&D easier for small companies guide.

Using venture capital schemes correctly can help a start-up business target rapid growth.

Qualifying conditions

To be eligible for SEIS or EIS investment, companies must meet the following criteria:

  • Have a permanent establishment in the UK.
  • Be an unlisted company with no immediate plan to list on a recognised stock exchange at the time of the share issue.
  • For SEIS, companies can’t be trading for more than two years. Whilst EIS companies this period is extended to seven years, (ten years with KIC).
  • For SEIS, companies cannot have more than 25 employees. For EIS this number is increased to 250 full-time employees at the time the new shares are issued, (500 employees with KIC).
  • Do not control another company other than qualifying subsidiaries.
  • Are not controlled by another company, or do not have more than 50% of their shares owned by another company.
  • Do not expect to close after completing a project or series of projects.
  • Do not have gross assets worth more than £15 million before any shares are issued, and not more than £16 million immediately afterward.

Qualifying trades

A company must also do a qualifying trade to be eligible for a venture capital scheme. Most trades are eligible for SEIS or EIS, but companies may not qualify if more than 20% of their trade includes things like:

  • Coal or steel production.
  • Farming or market gardening.
  • Leasing activities.
  • Legal or financial services.
  • Banking, insurance, debt, or financing services.
  • Property development.
  • Running a hotel.
  • Running a nursing home.
  • Generation of energy, such as electricity and heat.
  • Production of gas or other fuel.
  • Exporting electricity.

How long does it take to obtain Advanced Assurance?

The process usually takes up to eight weeks. HMRC will then send a statement notifying the company that it is likely to qualify for Advanced Assurance.

Once funds have been raised the company then needs to submit a compliance statement to use the scheme. Make sure that nothing has changed since you completed your Advance Assurance application. If it has, you’ll need to tell HMRC when you submit the statement, as the initial Assurance will no longer apply.

HMRC will then give a company permission to issue certificates to investors so that they can claim tax relief. Should a company not raise the full allocation, shares can still be issued.

Esper Wealth

At Esper Wealth we are targeting rapid growth. We have some outstanding Fintech solutions in the form of smart contracts and tokenized real estate. This disruptive technology will allow us to target a franchise model. This is why we are using venture capital schemes to offer equity investment to suitably qualified investors. If you would like to know more about our equity offering you can find out more information by visiting our specific SEIS and EIS landing page where you can download our investment prospectus.