Start-up series part 7
Investors in the start-up space will often be looking to benefit from tax reliefs specifically designed to promote innovation and enterprise.
The UK's Venture Capital Schemes provide some of the most generous tax reliefs in Europe. For example, under the Enterprise Investment Scheme (EIS), investors can claim a 30% income tax relief on subscription for shares and a complete exemption from paying capital gains tax on disposal. How is this relevant to your business? Well, the reliefs come with a catch, which is that the rules are extremely complex and impose requirements on the business to receive the investment, as well as the investor. It makes sense for you to be well prepared before seeking funding supported by these regimes.
So what should your company do to prepare for investment from an EIS fund, an EIS angel investor or a Venture Capital Trust?
They are looking for comfort that there is a real intention to grow and develop the business over a number of years and that an investor's capital is genuinely at risk. HMRC will therefore expect to see a detailed business plan, with forecasted revenue over a period of years and details of planned recruitment. This can take time to produce and so it is important that the document is already in play to prevent delays in submitting any application for advance assurance from HMRC.
You will also need to produce a detailed explanation of how and when the EIS or VCT monies will be used and how such use will benefit the trade. Other documents that HMRC will need to see include a copy of your register of members, details of all previous EIS and VCT investments and your most recent set of accounts. There is a lot of administration to prepare in advance.
The rules are complex and a small point of detail, such as the nature of the trade or the length of time the company has been trading for, can prevent the reliefs from being available. The company should be confident that it will qualify before going too far down the road with prospective investors. An informal view from your advisers should be sought for comfort that the reliefs are potentially available.
Despite improvements to the process, turnaround times from HMRC are still unpredictable. It is important that timings and expectations are managed accordingly and the application is sent as soon as possible. A lengthy delay is not uncommon and if the company is in need of the cash, it should build this into the timings.
At the same time, applications cannot be sent too early. HMRC now require details of all proposed investors and expected amounts subscribed and therefore a prospective application without this information may be rejected and create unnecessary delays.
An EIS investor is likely to need the company's assistance in completing their EIS1 forms. These forms can be detailed and time-consuming and must be sent to HMRC to allow the investors to claim their relief. If HMRC are satisfied, they will allow the company to issue EIS3 certificates and claim the relief.
Even then, the process isn't quite over. Many of the tests in the legislation are forward looking and must be met for the next three years after the date of the investment. The company must be aware of the relevant rules, so that it does not inadvertently breach one of the conditions. Doing so could lead to the loss of relief and a claim against the company from an investor. Therefore, it is important for you to be aware of what you can and cannot do going forward.
If you would like to know more about these reliefs and how best to prepare for them, please do get in touch with Mark Braude. Mark is a Legal Director at TLT, leading our Corporate Tax practice, and has a particular interest in advising early stage and fast growth technology companies on the tax reliefs available under EIS, SEIS and VCT schemes.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions