How Can Cryptocurrency, Blockchain, and Fintech Companies Ensure They Get SEIS and EIS Advance Assurance?

Cryptocurrency, blockchain, and fintech companies operate in highly innovative but complex sectors. While these industries captivate investors with their potential for disruption, they also face significant challenges in raising capital due to regulatory uncertainties and perceptions of risk. Tax relief schemes like the Seed Enterprise Investment Scheme (“SEIS”) and the Enterprise Investment Scheme (“EIS”) offer critical incentives for early-stage investment by providing substantial tax benefits to investors.

For businesses in these sectors, securing SEIS or EIS advance assurance from HMRC is an essential step in attracting investment. This article provides detailed guidance on how cryptocurrency, blockchain and fintech companies can successfully navigate the application process and address the unique challenges they face.

SEIS and EIS: A Brief Overview

The SEIS and EIS schemes are government-backed initiatives designed to encourage private investment in small and early-stage businesses by offering tax reliefs to investors. Advance assurance is a pre-approval process where HMRC reviews your business and provides an opinion on whether your company qualifies for these schemes. This assurance builds confidence among potential investors.

Key Features of SEIS and EIS:

• SEIS:
  • Designed for very early-stage businesses.
  • Allows companies to raise up to £250,000.
  • Offers investors 50% income tax relief on investments.

• EIS:
  • Suitable for more developed early-stage businesses.
  • Enables companies to raise up to £5 million annually and £12 million in total.
  • Provides investors with 30% income tax relief.

For cryptocurrency, blockchain and fintech companies, qualifying for SEIS or EIS requires a thorough understanding of HMRC’s criteria and carefully aligning of business activities with these requirements.

HMRC’s Approach to Crypto, Blockchain and Fintech Companies

Qualifying Trades and Activities

To qualify for SEIS or EIS, your company must engage in a “qualifying trade” which is a trade conducted on a commercial basis with the goal of generating profits and the activities carried on by your company or group do not consist to a substantial extent of “non-qualifying activities”. HMRC does not apply crypto asset-specific rules to SEIS or EIS applications. Instead, businesses are assessed based on general criteria.

Certain activities, such as software development, SaaS (Software as a Service) or using blockchain technology to deliver services, typically qualify as eligible trades. However, some crypto-related activities are classified as speculative or high-risk and may disqualify a company.

Activities Likely to Qualify:

• Developing and selling software solutions for the blockchain or fintech sectors.
• Providing goods or services to clients in the cryptocurrency industry, such as hardware manufacturing.
• Using distributed ledger technology for business purposes, such as record-keeping or publishing information.

Activities Likely to Be Excluded:

HMRC’s guidance (CRYPTO46000) outlines activities that are generally excluded activities for SEIS and EIS, including:

• Dealing in exchange tokens (cryptocurrencies) on one’s own account.
• Exchanging or broking cryptocurrency transactions.
• Mining exchange tokens as a primary activity.

Businesses engaged in these activities should assess whether they can demonstrate that their core trade is qualifying and whether these crypto-related activities or any other excluded activities are incidental.

Challenges for Crypto, Blockchain, and Fintech Companies

1. Speculative Business Models

Cryptocurrency companies are often perceived as high-risk due to market volatility and carrying out speculative activities. HMRC scrutinises applications to ensure that businesses are not overly reliant on speculative revenue streams.

• Solution: Clearly define your revenue model, focussing on sustainable and commercial activities. Avoid highlighting speculative elements such as token price appreciation or trading.

2. Mixed Activities

Businesses engaging in mixed activities, such as accepting cryptocurrency as payment or holding cryptoassets, face challenges in proving their eligibility. HMRC evaluates the scale of non-trading activities to determine whether a business is carrying out a qualifying trade.

• Solution: Ensure that crypto-related activities are incidental to the main trade and do not constitute a significant portion of the business.

One example is where a business that manufactures and sells physical products (such as furniture) might accept Bitcoin as a method of payment. While the core business activity would clearly qualify as a trade, if the company holds onto a substantial amount of cryptocurrency instead of converting it into fiat currency, it could be deemed to be engaging in non-trading activity.

HMRC’s guidance advises that companies involved in such mixed activities should consider the scale of their cryptoasset holdings carefully. If too much of the business’s activities consist of holding or investing in cryptocurrency, it risks failing the trading requirement, which could result in disqualification from SEIS or EIS.

Steps to Secure SEIS/EIS Advance Assurance

1. Define a Qualifying Trade

Ensure that your core business activities align with HMRC’s definition of a qualifying trade. Avoid engaging in restricted or excluded activities as your primary focus.

2. Develop a clear Business Model

Present a transparent and sustainable business model that demonstrates how your company generates revenue and adds value to the market. Highlight innovation and avoid speculative language.

3. Address HMRC’s Concerns

Anticipate potential red flags and proactively address them. For example:

• If your business holds crypto assets, explain how this is incidental to the main trade.
• If your activities involve blockchain technology, clarify how it is used to deliver a qualifying service.

4. Seek Advance Assurance Early

Applying for advance assurance allows you to receive feedback from HMRC before seeking investment. However, be aware that HMRC may decline to provide an opinion if your business model is overly complex or ambiguous.

For businesses in these sectors, obtaining advance assurance is not always straightforward. Given the complexity and novelty of crypto and blockchain technologies, it may be difficult for HMRC to offer definitive opinions on some aspects of these business models. That said, advance assurance remains an invaluable tool for businesses that can demonstrate their eligibility under the schemes, helping to build confidence for potential investors.

Summary

Securing SEIS or EIS advance assurance is a critical step for cryptocurrency, blockchain and fintech companies seeking to attract early-stage investment. By aligning your business activities with HMRC’s criteria, addressing potential challenges proactively and presenting a clear business plan, you can enhance your chances of success.

How we can help

If you are a company seeking advice in relation to SEIS or EIS and require assistance in submitting an application to HMRC, we offer a 20 minute discovery call as a starting point to discuss your situation in further detail.

Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.