At present, through the Small Company Enterprise Centre, HMRC operates a non-statutory advance assurance service for venture capital schemes, so companies can submit their plans to raise money, get details of their structure and trade before the shares are issued, with advice on whether or not the proposed issue is likely to qualify for relief.
HMRC recommends using this, but companies are not required to.
For David Newman, founding director of enterprise investment scheme manager Viridis Navitas Capital Partners, SEIS and EIS were designed to promote investment in small and medium enterprise growth, therefore, all propositions that do not fulfil HMRC’s criteria are at risk of being at some point ‘out of scheme’, negating any tax benefits assumed at the time of investment.
“HMRC offer an advance assurance facility, whereby information memorandums can be submitted for their approval, however, most SEIS and EIS funds do not have advance assurance.
“Given that investment tax relief can only be provided once the fund actually makes an investment into a qualifying company, and the funds do necessarily commit to a minimum time frame for investment, this puts the investors income tax relief component for the current year at risk,” added Mr Newman.
“Also, the projects offer little likelihood of success by their very nature, because the investor is driven by tax relief of 50 per cent on the way in, loss relief of 45 per cent in the event of failure and 0 per cent CGT in the event of success.”
Dermot Campbell, managing director of alternative finance platform Kuber Ventures, said all the SEIS and EIS funds he was aware of seek advance assurance for the majority of their investments.
He said: “There are some occasions where they are investing in an established company, generally taking a minority stake, and there is no time to get advance assurance; however, this is rare and the tax risks would be low, since the companies would be operating in the heart of the rules.
“Once advance assurance is granted, providing the management do what they said they would do, there is no reason why the reliefs would be clawed back.
“There is a risk that the management team could breach the EIS rules, and this is one of the benefits of working with an EIS or SEIS fund, since the fund managers will be able to work with the management to help them comply with the rules.”