Improving SEIS 1 and EIS 1 Compliance Statement Applications: Avoiding and Resolving Common Mistakes

Completing SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) compliance statements (SEIS1 and EIS1 forms) can be challenging due to the strict requirements set by HMRC.

Errors or non-compliance can result in application rejections, delays in obtaining reliefs for investors, or even the loss of scheme benefits.

Below is a guide to key compliance challenges, common mistakes to avoid, and solutions for resolving issues when they arise:

1. Eligibility Issues

a. Ineligible Company Activities

• Complication: SEIS/EIS reliefs are restricted to specific trading activities. Activities like property development, financial services, and legal services are excluded.
• Common Mistake: Overlooking that part of the company’s activities fall under restricted categories.
• Resolution: Conduct a detailed review of all company activities and seek professional advice if needed. If ineligible activities are discovered after submission, amend the application immediately and notify HMRC to avoid penalties.

b. Age of the Company

• Complication: Companies must meet specific age limits to qualify:
  • SEIS: Must be trading for less than 2 years.
  • EIS: Must be trading for less than 7 years (unless it’s a “knowledge-intensive” company).
• Common Mistake: Submitting an application when the company exceeds the age limit.
• Resolution: If the age requirement has been exceeded, consider restructuring future funding to apply under different relief schemes or seek “knowledge-intensive” company status if applicable.

c. Investment Limits

• Complication: SEIS and EIS have strict limits on the amounts a company can raise:
  • SEIS: Maximum of £150,000.
  • EIS: £5 million per year and a £12 million lifetime limit.
• Common Mistake: Ignoring previous investments and exceeding the caps.
• Resolution: Review all previous funding and ensure cumulative totals align with the limits. If caps are exceeded, consult with HMRC on rectification options or reclassify portions of investments.

d. Gross Assets Test

• Complication: The company’s gross assets must not exceed:
  • SEIS: £200,000 before the investment.
  • EIS: £15 million before the investment and £16 million immediately after.
• Common Mistake: Miscalculating gross assets or neglecting to include subsidiary valuations.
• Resolution: Perform a thorough financial audit and adjust calculations. If errors are found post-submission, file corrected statements and notify HMRC.

2. Investment and Shareholding Rules

a. Connection to the Company

• Complication: Investors cannot be employees or have significant control (more than 30% of shares, voting rights, or assets).
• Common Mistake: Allowing investors to inadvertently become connected parties by taking on roles like director positions.
• Resolution: Remove connected investors from the scheme and offer to replace their shares with non-relief shares. Notify HMRC of any changes to the shareholder structure.

b. Share Issuance Rules

• Complication: Shares must be ordinary shares with no preferential rights.
• Common Mistake: Issuing shares with guaranteed dividends, fixed redemption rights, or preferential rights.
• Resolution: Reissue compliant shares or amend share agreements where possible. If the error affects investor relief, communicate the impact to the investors promptly.

c. Advance Subscription Agreements (ASA)

• Complication: SEIS/EIS investments cannot constitute loans or debt, although ASAs are permissible if structured correctly.
• Common Mistake: Drafting ASAs that resemble loans rather than equity investments.
• Resolution: Review and amend ASAs to remove any loan-like terms. Seek legal advice to ensure agreements meet SEIS/EIS requirements.

3. Timing Errors

a. Trading Start Date

• Complication: To claim SEIS/EIS, a company must either:
  • Be actively trading, or
  • Plan to trade within 2 years of the share issuance.
• Common Mistake: Misrepresenting the start date or failing to begin trading within the required timeframe.
• Resolution: If trading has not started as expected, document the delay and outline corrective steps. If timelines cannot be met, inform HMRC and adjust future applications.

b. Application Timing

• Complication: SEIS1/EIS1 forms can only be submitted after at least 70% of SEIS/EIS funds have been spent on qualifying activities.
• Common Mistake: Submitting forms before meeting the 70% expenditure rule.
• Resolution: Track expenditures closely and delay form submission until the threshold is met. If submitted too early, withdraw the application and resubmit once compliance is achieved.

4. Use of Funds

a. Qualifying Business Activities

• Complication: SEIS/EIS funds must be used solely for qualifying business activities, such as growth and development.
• Common Mistake: Allocating funds to non-qualifying purposes, such as debt repayment.
• Resolution: Reallocate funds toward qualifying activities and document adjustments thoroughly. If misuse occurs, update HMRC and rectify future spending plans.

b. Spending Timeline Compliance

• Complication: SEIS/EIS funds must be used within specific timeframes:
  • SEIS: 3 years.
  • EIS: 2 years (or as part of a long-term growth plan).
• Common Mistake: Missing the deadlines for using funds.
• Resolution: Prepare spending forecasts to meet timelines. If delays arise, provide evidence of progress and request flexibility where possible.

5. Documentation and Evidence

a. Insufficient Records

• Complication: Detailed records must be kept of investments and how funds are used.
• Common Mistake: Providing incomplete or inconsistent evidence to HMRC.
• Resolution: Implement an internal audit system to track all spending and shareholder records. Resubmit accurate supporting documentation if discrepancies arise.

b. Incorrect or Incomplete Forms

• Complication: SEIS1/EIS1 forms must be accurately completed and include all required supporting documents.
• Common Mistake:
  • Omitting key information such as investment amounts or trading details.
  • Failing to include share issue certificates.
• Resolution: Carefully review forms before submission and cross-check with required documentation. If omissions are found, promptly correct and resubmit the forms.

c. Advance Assurance Misalignment

• Complication: SEIS/EIS1 applications must align with the details submitted during the advance assurance request.
• Common Mistake: Deviating from the initial business plan or funding structure.
• Resolution: Notify HMRC of changes to the original plan and request a reassessment if needed. Consistency between documents is key.

6. Interaction Between SEIS and EIS

• Complication: SEIS and EIS cannot apply to the same share issue. However, companies can raise SEIS funds first and transition to EIS for subsequent rounds.
• Common Mistake: Claiming both schemes for the same share issuance or failing to sequence SEIS before EIS.
• Resolution: Adjust future funding rounds to ensure proper sequencing. Correct past errors by submitting revised documentation to HMRC.

7. Investor-Related Errors

a. Investor Eligibility

• Complication: Investors must meet specific criteria to qualify for tax relief.
• Common Mistake: Accepting investments from ineligible investors (e.g., those with substantial connections to the company).
• Resolution: Replace ineligible investors and reissue shares if necessary. Inform HMRC of any shareholder adjustments.

b. Investor Compliance

• Complication: Investors must hold their shares for at least 3 years to retain tax relief.
• Common Mistake: Failing to communicate the 3-year holding requirement, leading to premature share disposals.
• Resolution: Send periodic reminders to investors about holding requirements and provide clear guidance on consequences of early disposal.

8. Misinterpreting SEIS/EIS Rules

• Complication: Misunderstanding scheme guidelines can lead to ineligibility.
• Common Mistake: Misinterpreting what qualifies as “knowledge-intensive” for extended EIS eligibility or assuming all startups automatically qualify for SEIS.
• Resolution: Regularly review HMRC guidance or consult specialists for clarification. Update internal teams on key rules and definitions to prevent recurring issues.

Failure to Consult Professionals

• Complication: SEIS/EIS regulations are intricate, and mistakes can result in significant tax consequences.
• Common Mistake: Attempting to complete SEIS1/EIS1 forms without consulting tax advisors, accountants, or legal experts.
• Resolution: Engage experienced advisors early in the process to avoid costly errors. If mistakes occur, seek professional help to resolve them quickly.

Key Tips to Avoid Mistakes

1. Seek Advance Assurance: Obtain HMRC’s advance assurance to confirm eligibility before issuing shares.
2. Use Professional Advisors: Engage SEIS/EIS compliance experts to review applications and supporting documents.
3. Double-Check Rules: Regularly review updated SEIS/EIS guidance to ensure ongoing compliance.
4. Maintain Records: Keep detailed documentation of investments, expenditures, and shareholder information.
5. Educate Investors: Clearly communicate scheme requirements, such as the 3-year holding period.

How we can help

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Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, 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.