How To Apply For SEIS And EIS Advance Assurance

Jonathan Lea November 11, 2015

Applying for advance assurance enables HMRC to confirm in writing that, on the basis of the information you’ve provided, your company share offer will qualify for the Seed Enterprise Investment Scheme (SEIS) and/or the Enterprise Investment Scheme (EIS) tax reliefs. Receiving the advance assurance will also facilitate the next step of filing the SEIS1 and/or EIS1 ‘compliance statement’ forms (see below) following the share issue as HMRC will be less likely to ask questions if they already have the company on record from the advance assurance stage.

It’s not mandatory to apply to HMRC for advance assurance, but its commonly a pre-requisite in order to attract investors to subscribe for shares in your company. Please note HMRC no longer allow any right of appeal where advance assurance is not given so it is vital to submit a carefully produced application and avoid any errors. HMRC own stats show that in 2018-2019 their approval rate was 62% for EIS advance assurance applications, down from 75% in 2017-2018 and we do seem to be experiencing a trend for HMRC to be a lot tougher with applications than they were previously.

Plus, even if you raise money without the benefit of an advance assurance application, when you submit a SEIS 1 or EIS 1 compliance statement (see below) you will still have to provide HMRC with all the same information and supporting documents at that stage that you would have already done if you had applied for advance assurance at the outset. If you don’t get your SEIS 1 or EIS 1 accepted by HMRC you will also be left in a difficult situation with investors, who have put their trust and confidence in you, having to tell them that they can’t actually make use of the SEIS and/or EIS tax reliefs.

We also find that applying for SEI advance assurance at the outset allows a startup company to better educate themselves about how SEIS and EIS work and as a result companies are less likely to make costly mistakes and fall victim to the many pitfalls that we see when attempting to raise money in a SEIS and EIS compliant manner.

Before giving an assurance, HMRC will need to be satisfied that the:

company is a qualifying company;
shares to be issued will be eligible shares;
shares will be issued to raise money for a qualifying business activity; and
the money raised is to be employed only by a company that satisfies the rules of the scheme.

Note that if after a SEIS round you want to raise further subscription monies that take advantage of the separate and additional EIS relief, then you can apply in respect of both reliefs within a single advance assurance application. We also do a lot of EIS work and our fixed fee mentioned below also covers EIS and combined SEIS and EIS advance assurance applications.

Its important to get an advance assurance application right as HMRC won’t allow a company to make a further application if the first one is declined (instead they say you can submit additional supporting information with the compliance statement once you’ve raised the money and issued the shares), while any requests for further information and/or clarification once HMRC have received and reviewed your application will lead to significant delays.

We have advised on SEIS and EIS for several years and our team are on track to advise on, produce and submit over 75 SEIS and EIS advance assurance applications in 2019. We offer a fixed fee and guaranteed service for this work, further details of which can be found below.

Timing

If you have provided all relevant information and documents with your application in a correct and clear manner then it should take no longer than four weeks (from submission) to hear back from HMRC with an advance assurance confirmation. Although since the last few months of 2019 we have often seen quicker response times of around a week from HMRC.

If we submit an application on a company’s behalf it usually takes between 7 to 10 days from being instructed in order for us to submit an advance assurance application (depending on how quickly the required information is supplied to us).

The SEIS / EIS application form

Please note that new versions of HMRC forms are mandatory from 1 November 2018 and they will no longer accept applications made using the old versions of the forms.

For copies of these new forms, please go to gov.uk and search the following:

For an advance assurance form for SEIS, EIS or VCT search for “venture capital advance assurance” and select the first result.
For EIS1 compliance statement search “EIS”. Select the first result and read how to apply.
For SEIS1 compliance statement search “SEIS”. Select the first result and read how to apply.

Additional information

As part of an application you will need to submit the following documents and information (please note that some of the below are new requirements that were introduced in November 2018):

a covering letter to support the application form and reference all information and documentation being supplied, as well as to include all relevant details and arguments that will help HMRC grant you advance assurance (even for simple applications we recommend this letter is at least three pages long);
If the application has been submitted by an agent on behalf of the company, you must include a signed letter from the company confirming the authority of the agent to act on their behalf. There is an HMRC Agent Authorisation template that we use for our applications;
A valid company Unique Tax Reference (UTR) (otherwise known as the ‘corporation tax reference’) and Company Reference Number (CRN);
A copy of the latest available accounts of the company, and of all subsidiary companies. If the company has not yet drawn up a set of accounts, HMRC does not expect it to do so for the purpose of making an advance assurance application;
The company’s business plan / pitch deck (or even a short executive summary) including financial forecasts;
Details of all trading or other activities to be carried on by the company and any subsidiary, and a note of which company or companies will use the money raised, and how;
A schedule of all tax-advantaged investments received by the company, including the amount, date and scheme under which each investment was received;
Details of the amount the company hopes to raise, and a schedule of the activities, and amounts, on which it (or its subsidiary) intends to use the money (the amount does not need to be precise but should be close to the actual amount needed and not state rough figures such as ‘up to £5 million’);
An up-to-date copy of the Memorandum and Articles of Association of the company and of any subsidiary, and details of any changes to be made;
A copy of the register of members (a list of your current shareholders) at the date of submission of the advance assurance application;
Details of any subscription agreement or other side agreement to be entered into by the shareholders;
The latest draft of any prospectus, information memorandum, brochure or similar document relating to the relevant fund raising or offer to be issued to potential investors;
Confirmation that the company expects to be able to complete the declaration on a compliance statement in due course; and
Companies that have never raised an investment under one of the tax-advantaged schemes must provide information about their prospective investors in their advance assurance application (see further below).

The UTR or corporation tax reference number is a 13 digit reference number printed on a letter you will have received from HMRC entitled ‘Corporation Tax Important Dates’ after you registered the company. Ensure that you do not give your VAT number or your personal UTR number by mistake.

SEIS / EIS Checklists

From 10th October 2019 HMRC introduced SEIS and EIS advance assurance checklists which must now be completed and submitted with any SEIS and / or EIS advance assurance application requests.

Both checklists make clear that HMRC will now not accept advance assurance applications for SEIS and / or EIS without both a completed advance assurance application form and accompanying checklist(s). Further detail and guidance on these checklists can be found here.

SEIS / EIS Business Plan

The business plan can also set out how the company and the share issue will comply with the SEIS and EIS requirements, such as the fact that ordinary shares (with no preferential rights) are being offered to investors and the subscription monies being raised are within the SEIS and EIS limits. Also make sure these and other key points are highlighted in your covering letter to HMRC.

As well as the financial forecasts, we also recommend that the business plan includes a detailed expenditure forecast which satisfies the aforementioned requirement for ‘Details of the amount the company hopes to raise, and a schedule of the activities, and amounts’.

When it comes to applying for SEIS advance assurance the general rule is ‘less is more’ regarding the business plan requirement. A basic pitch deck or executive summary is sufficient – as long as you give HMRC a good understanding of what the business is and don’t include any information that may harm your application. We always check the business plan document carefully and often remove references that could lead to an application being rejected, particularly in respect of the risk to capital condition.

As an aside, if you would like to hire someone cost effective to put together an attractive and well written pitch deck on your behalf we recommend Studio Laker. The business plan may also be in the form of what is known as an information memorandum, usually a more formal and structured document that can be particularly helpful in attracting investment.

Investment documentation

The subscription agreement is usually the main contractual document signed by the company and investors (and sometimes the founders if they are personally giving warranties) that governs the investment and if well produced should help induce investors into the deal. It should clearly set out the exchange and completion process and may also be accompanied by bespoke articles of association (as opposed to the standard ones the company was incorporated with) and a separate shareholders agreement – constitutional documents that regulate the ongoing operation of the company and relationship of the shareholders.

We don’t recommend this, but sometimes the subscription agreement and shareholders agreement are combined as one document (sometimes referred to as an ‘investment agreement’). This makes things harder to manage for additional investment rounds and investors as you will only really want new shareholders to see the shareholders agreement (and sign a deed of adherence saying they agree to become a party to it) rather than also the terms relating to a previous investment round. Plus different terms relating to different investors you will want in separate subscription agreements, rather in a shareholders agreement available to and binding on all shareholders.

A form of subscription agreement suitable for raising SEIS and EIS investments is included in our template information memorandum available at our shop. A standalone subscription agreement can also be downloaded here.

Such documents will sometimes be subject to negotiation with investors, but you can submit preliminary draft versions to HMRC as part of your advance assurance application.

Covering letter

A key part of a successful advance assurance application is to write a detailed and clear covering letter that should have the effect of clarifying any ambiguous points for HMRC and confirming the main ways that your company and the share offer meet their requirements. Such an approach should ensure that you receive the assurance from HMRC first-time rather than getting a letter back from them asking for further clarification.

An example of where you need to add clarity in the covering letter will be the situation where a software company 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 if the whole, or greater part, of the underlying intellectual property that generates the revenues is created by your company.

Don’t hide any critical information which you think might be dubious as if you do this then your advance assurance will be worthless if HMRC subsequently finds out about something that will invalidate the relief after the shares are issued. If so they can withdraw the tax relief to your investors, and possibly fine you if you were aware of the issue but didn’t let them know.

A template covering letter and detailed guidance notes can be downloaded from our shop.

Individual eligibility

An individual is eligible for SEIS and/or EIS relief if he or she complies with the requirements set out at VCM11000, the main points being:

Be an individual (VCM10520) who need not be a UK resident but must have UK income tax liability against which to set the relief.
The investor must have no ‘connection’ (see guidance on VCM11050 to VCM11090) with the issuing company (VCM11020);
The investor or any associate (see definition at VCM11030) must not have received a loan which would not have been made, or would not have been made on the same terms, were it not for the EIS investment (VCM11030); and
The investor must have been subscribed for the shares for genuine commercial reasons and not as a part of a scheme or arrangement the main purpose or one of the main purposes of which is the avoidance of tax (VCM11040).
To retain income tax relief or CGT exemption, the shares must be held for at least three years.
No material stake above 30% of the company’s share capital.
Subscribe for (EIS- qualifying) shares wholly in cash that are fully paid up at the time of issue.
No pre-arranged exit (ITA 2007, s177; TCGA 1992, Sch 5B, para 11) (VCM12080).

Note of course that these are not the only conditions that must be met – as mentioned elsewhere conditions must also be met in relation to the issued shares, the funds raised and the arrangements in general, the issuing company and the qualifying trade.

Gross assets

One of the SEIS qualifying conditions is that at the time at which you raise SEIS investment the company has less than £350K in gross assets.

For EIS, the company’s gross assets cannot (currently) exceed £15 million before the share issue, or £16 million immediately after.

HMRC’s general approach is that the value of a company’s gross assets at any time is the aggregate of the values of the company’s gross assets as shown in its balance sheet if the company were to draw one up at that time (without any deduction in respect of liabilities).

HMRC will not regard the assets of a company immediately before the issue of the shares in question as including any advance payment received by the company in respect of that share issue.

Formal company approval following an issue of shares

Once you have received the advance assurance from HMRC and issued the shares to investors then before investors can claim any tax relief the company must complete form SEIS 1 (and/or EIS 1) (otherwise known as a ‘compliance statement’) and send it to the Small Companies Enterprise Centre (SCEC). The company can’t submit a SEIS 1 form until either it’s been trading for four months or if not yet trading that it’s spent at least 70% of the money raised following the advance assurance and issue of relevant shares.

If on the basis of the information supplied in the SEIS 1 (and/or EIS 1) form the SCEC accepts that the company meets the scheme’s criteria it will send the company a certificate confirming this along with SEIS 3 (and/or EIS 3) claim forms for the company to send to each of the investors so they can individually claim the tax reliefs they are entitled to.

Subsequent EIS round

The requirement that at least 70% of the SEIS funds raised must be spent before the EIS investment is made was abolished with effect for shares issued on or after 6 April 2015 (paragraph 8, Schedule 5, Finance (No.2) Act 2015). However there is still required to be a small gap between, effectively, an initial SEIS round and subsequent EIS round so that there is separate paperwork and records for each SEIS and EIS aspect of the fundraising.

It is important to understand that once shares have been issued and EIS relief applied for, you cannot subsequently apply for SEIS. If, for example, a company is raising £500,000 via a combination of SEIS shares (up to £250,000) and EIS shares (the balance of £250,000), it must finish issuing the SEIS shares before it moves on to issuing the EIS shares.

Genuine commercial reasons

Please note that any investment must be made for genuinely commercial reasons and not for tax avoidance purposes (section 257BE, ITA 2007), i.e. for a scheme that seeks to use SEIS to avoid PAYE and NICs. For HMRC’s guidance on this point, see HMRC: VCM32060: SEIS: income tax relief: the investor: no tax avoidance.

HMRC guidance

For further HMRC guidance on both SEIS and EIS you can refer to the relevant parts of their venture capital scheme manual.

What are the main SEIS (and EIS) tax reliefs?

Note that once a company has carried out an intial SEIS compliant round, the company can raise subsequent rounds (up to £12 million for most companies) pursuant to the EIS tax reliefs available for individual investors.

It is essential that the investor claims income tax relief, as the loss relief and capital gains tax (CGT) relief will not be available unless income tax relief has been triggered.

SEIS Reliefs

Income Tax Relief of 50% of the amount invested in SEIS qualifying shares can be offset against personal income tax liabilities up to £200,000 in the tax year that the qualifying shares are acquired (or for the tax year preceding that in which the SEIS investment is made, save to the extent Income Tax Relief has already been claimed for the preceding year).
Capital gains tax exemption of up to 50% will be offered in respect of gains realised on the disposal of assets that are invested in SEIS Qualifying Shares in the same tax year.
Investors can elect under the carry-back rules to treat part or all of their investment as if made during the 2014/15 tax year and therefore, may benefit from capital gains reinvestment relief to the extent that they have realised a chargeable gain in the 2014/15 tax year.
SEIS investments are expected to be 100% inheritance tax exempt after they are held for two years.
Investors are exempt from paying any capital gains tax from the sale of their SEIS Qualifying Shares.
Losses (net of income tax relief already obtained) on SEIS investments can be offset against income or capital gains in the tax year in which the disposal occurs, or in the previous year, or both.

EIS reliefs

Income tax relief of 30% of the amount invested in EIS qualifying shares can be offset against personal income tax liabilities up to £1 million in the tax year that the qualifying shares are acquired (or for the tax year preceding that in which the EIS investment is made, save to the extent Income tax relief has already been claimed for the preceding year).
Investors facing capital gains tax liabilities on other investments can use their EIS investment to defer the capital gains (for all capital gains up to three years prior to, and one year after, the investment is made) . Tax won’t be due for as long as their EIS investment is held and the capital gain will be eliminated if the EIS qualifying shares are held at death.
EIS investments are expected to be 100% inheritance tax exempt after they are held for two years.
Investors are exempt from paying any capital gains tax from the sale of their EIS qualifying shares, provided the shares have been held for at least 3 years.
Losses (net of income tax relief already obtained) on EIS investments can be offset against income in the tax year in which the disposal occurs, or in the previous year, or both. Alternatively, the loss can be set off against capital gains in the year of disposal.

Important update 1: Naming investors

As of 2nd January 2018 HMRC now require you to also include in the application one or more names of people you believe will make up the investment round.

Provision 2.8 of HMRC’s relevant advance assurance guidance note says:

“From 2 January 2018 we will not provide an advance assurance on speculative applications. More than a third of the advance assurances we provide do not result in an investment. To ensure HMRC resources are used efficiently, therefore, we will only provide an opinion where the application names the individual(s), fund manager(s) or other promoter(s) who are expected to make the investment. Though we do not expect the company making the application to have formalised offers of investment, we do expect the company to have approached potential investors before making the advance assurance application to determine the likelihood that they will attract actual investment.”

Companies that have never raised an investment under one of the tax-advantaged schemes must provide information about their prospective investors in their advance assurance application. The applications we submit usually name at least two potential investors and this has so far proved sufficient for HMRC’s purposes (note that it is of no consequence if those named then subsequently don’t invest). If you are not able to provide this information then HMRC won’t consider your application. You’ll find more information on gov.uk and searching “VCM35045” for SEIS or “VCM14045” for EIS.

HMRC will expect details of the potential investors or, if the company is using an intermediary to provide investors, details of the fund managers or other business promoters who are expected to provide these investors as follows:

a) The names and address of potential investors, or

b) Companies seeking investment through a crowdfunding platform: evidence, for example letters or emails, to demonstrate that the company has engaged with and begun the screening process with the platform. It is not enough for the company to show it has approached a platform; there must be confirmation that the platform accepts the company may be a viable investment for its customers and that further engagement is underway. In order to consider your application, HMRC require evidence showing that you have engaged with the crowdfunder and that you have been accepted by the platform, or

c) Companies seeking investment through a fund manager or other business promoter: evidence, for example letters or emails, to demonstrate the fund manager or promoter has agreed to act on the company’s behalf. The agreement may be provisional, that is, subject to various conditions, including the company securing an advance assurance. It is not enough for the company to show it has approached a fund manager or other business promoter; there must be confirmation that the fund manager or business promoter has agreed the company may be a viable investment for their customers and that further engagement is underway.

Important update 2: Risk-to-capital condition

HMRC recently issued guidance on new the new ‘risk-to-capital’ condition relating to the SEIS, EIS and Venture Capital Trust schemes, introduced by Section 14 of the Finance Act 2018.

The risk-to-capital condition is intended to prevent capital preservation arrangements by requiring an investment in the schemes to meet both of the following conditions:

1. the company in which the investment is made must have objectives to grow and develop over the long term; and

2. the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).

HMRC’s guidance on this new area is very detailed and is subject to continued review. There are several subjective grey areas that are open to interpretation, meaning a company applying for advance assurance should take care to produce a well considered and persuasive application.

The risk-to-capital condition applies to investments in EIS, SEIS and VCT schemes made on or after 15 March 2018.

Can you assist with SEIS and/or EIS advance assurance applications and how much does it cost?

For the last few years we have applied for SEIS and/or EIS advance assurance on behalf of clients on a fixed fee basis. We currently tend to charge between £750 to £3,500 plus VAT to advise on, produce and submit SEIS and EIS advance assurance applications (the same fee applies for dual SEIS and EIS applications, so best to apply for both SEIS and EIS advance assurance at the outset), depending on the complexity involved. While some are very straightforward (e.g. a technology startup with no history) please bear in mind that some applications require a lot more time and attention than others in order to be successful.

Except for the more complex applications involving one or more grey areas of the rules, we are happy to offer a guarantee in respect of our work so that if for any reason an advance assurance application is not successful we will reimburse our fees in full.

Our SEIS/EIS team of three solicitors, three trainee solicitors and two paralegals currently submit between 5 and 10 SEIS/EIS advance assurance applications each month. We are used to resolving the common issues that arise and ensuring information is presented to HMRC in the right way and persuasive arguments are made which reference the relevant parts of HMRC’s own guidelines.

Our work involves advising on meeting the qualifying criteria and how to deal with any unusual factors, ensuring we have all relevant information from you to make the application, filling in the relevant form, completing HMRC’s new questionnaire (effective from October 2019), commenting on the supporting documents such as the business plan (and recommending changes where necessary) and drafting a comprehensive covering letter to go with the application so that HMRC are likely to approve it first time round without turning it down or coming back with further questions.

It is important to take care with the advance assurance application. We see lots of mistakes made, even with the straightforward cases. If for any reason HMRC decline to give you advance assurance then you can’t apply again which will have a detrimental effect on your ability to raise early stage SEIS/EIS funding. Note that when HMRC decline to give advance assurance they state that you can still submit SEIS and EIS compliance statements (with further supporting information) after you raise money and see if these are accepted then. However, the absence of advance assurance won’t help you raise the money in the first place.

Free initial call

For all new potential clients and matters we hold a no cost and no obligation initial 20 minute call to discuss your requirements and agree in principle different ways we can help you. We try to hold these calls at either 8:30 am or 9 am most mornings (and sometimes at midday) so as not to interfere with the demands of existing clients and work. This also tends to be a convenient time to speak to most people. After this call we can then email you a scope of work, fees quote and confirmation of any other points or information mentioned on the call.

Additional SEIS/EIS and equity fundraising services

We have many years experience advising on successful startup fundraisings. Some companies have worked with us to raise several million pounds from a combination of SEIS, EIS, overseas and institutional investors after we first helped them receive an advance assurance confirmation from HMRC.

Once a company has received SEIS/EIS advance assurance, we usually arrange another no cost no obligation call with you to agree how best we can help you with any further parts of the fundraising process, following which we can be instructed separately to provide advice on how to structure your fundraising and the issue of new shares correctly, including producing and advising on any term sheet, the subscription agreement and the changes to the company’s share capital, making changes to your constitution (producing a shareholders agreement and/or new articles), notifying Companies House on your behalf on any subdivision of the existing shares required and the issue of new shares and producing relevant shareholder resolutions, board minutes and share certificates.

We can also provide you with a copy of our database of over a hundred active individual angel and early stage investors, as well as pointing you in the right direction for advice and support on how best to market your offering and pitch to investors.

If needed, following money being raised and shares being issued, we can also complete and submit the SEIS 1 and EIS 1 compliance statements so that UK tax resident investors can receive the HMRC tax certificates required to claim their tax reliefs.

Any questions?

If anything is unclear or any particular query springs to mind it would be great to hear from you in the comments section below.

Further reading

The government Venture Capital guidance manual, in particular VCM35000 for SEIS and VCM14000 for EIS.

Angel Investment Term Sheet

Startup Investors Forum

How To Issue New Shares In A UK Company

Venture Capital and SEIS and EIS Angel Equity Investment Legal Terms

SEIS Slideshare Presentation (particularly the worked examples on pages 7, 8 and 9)