Finding launch funding is one of the key considerations of starting a business. You may wish to raise capital from investors by utilising the government’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which provide tax breaks to investors who back small businesses. In order to pursue this strategy successfully, avoid making the following seven mistakes.
Failing to assess your circumstances
Before applying for these governmental investment schemes, first assess whether they are right for your business’ circumstances. Yes, qualifying for either EIS or SEIS can make your company more attractive to investors, but these programmes can impose restrictions on how your firm operates in future. If applying for these schemes will prevent you from steering your company in the direction you believe it needs to take in order to succeed, they could be more harmful than beneficial.
Not planning for Advance Insurance
You can pre-check whether your firm will qualify for EIS or SEIS by applying for ‘Advance Assurance,’ which is based on intended trade and use of funds, from HM Revenue and Customs (HMRC). It is key that you seek assurance before you approach investors. If you fail to do so, you could lose vital capital, as HMRC is currently taking up to two months to process Advance Assurance applications.
Turner Little would advise you to apply for Advance Assurance for EIS and SEIS simultaneously. We should also note that with careful structuring, you can attain financing via both EIS and SEIS at the same time, rather than waiting for SEIS capital to run out, before applying for EIS investment.
Assuming assurance is a guarantee
With an Advance Assurance, HMRC are basically saying that based on the facts, they believe that it is likely that you will qualify for the EIS and SEIS schemes. But Advance Assurance cannot be regarded as a guarantee, so do not base your company’s investment strategy around it. Submit as much information as possible, so HMRC can send you an accurate Advance Assurance. It is advisable to include an investor memorandum and financial models with your applications.
It is important to note that in some cases, the form on HMRC’s website may not supply with all the relevant information needed to apply for EIS and SEIS relief successfully. It is vital that you accompany your application with a cover letter, detailing precisely how your company intends to operate. This can allow you to illustrate comprehensively why you should qualify for the EIS and SEIS schemes.
Failing to track legislative changes
There are no fixed dates on Advance Assurances. But the government updates EIS and SEIS legislation regularly andit is vital that you keep track of these developments. If there is a long delay between gaining assurance and issuing shares and the relevant legislation changes, you may no longer qualify for EIS of SEIS relief, rendering you application useless.
We should also note that if you gained Advance Assurance a long time ago e.g. over a year, some institutional investors will not invest through the EIS scheme, due to the fact that legislation can change. Therefore, it is key that if you received assurance from HMRC a long time ago, that you ask the governmental agency to confirm whether your firm still qualifies for EIS relief.
Issuing shares before receiving money
Business Advice portal Start-Ups writes that the most common reason investments do not qualify, is that the firm has issued the shares, before they received the money. It is vital that you do not issue shares based on the expectation that you will receive cash. Also, avoid releasing shares when you incorporate your company, if you have not yet set up a bank account to handle the money. As registered bank intermediaries, Turner Little can advise you on setting up UK bank accounts.
Not planning for certificates
After receiving Advance Assurance, you will need to inform HMRC of the investments made via forms (S)EIS1. The agency will then send you blank (S)EIS 3 certificates to fill out and give to investors. Do not wait for a long period of time before applying for these certificates. Without them, investors cannot claim tax relief on their tax returns, so it is key that you apply for these certificates as soon as feasibly possible.
We should note that sometimes, it can take HMRC up to two months to process the necessary tax certificates. Therefore, EIS and SEIS tax relief can carried back by a year. Typically investors will want to receive the necessary certificates well before the 31 January tax return filing deadline.
Letting your qualifying status lapse
In order to qualify for EIS or SEIS, your firm must meet the necessary requirements for three years after either the issuance of shares or the commencement of trading. If your circumstances change e.g. you sell the firm within this three year period, you may no longer qualify. In these cases, you are required to inform HMRC, who will often claim back income tax relief from investors, typically with interest. It could be in your best interests to ensure that you firm’s qualifying status does not lapse.
But as a company director, it is your duty to act in the best interests of your business at all times. Therefore, you cannot be compelled to execute all the steps necessary to maintain your investors’ EIS relief. We should point out that sometimes a decision such as selling your firm, which could harm EIS investors but not your other shareholders, could be in your enterprise’s best interests.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
