The EIS changes initially announced in the 2017 Autumn Statement have now passed into law with the granting of Royal Assent on the 15th of March 2018. Here are the four main changes that you need to be aware of currently:
1) Advance assurance applications must include the names and addresses of potential investors. This change was made to reduce the number of applications that HMRC receives, to reduce the volume of requests to better concentrate efforts on propositions that have a higher likelihood of raising capital. HMRC guidelines require for applicants to provide the names and addresses of six interested investors (of course if you are raising a small amount, six names may not be necessary). For more information on this change, please see our prior blog called "The chicken or the egg? New HMRC requirements to stop speculative SEIS/EIS advance assurance applications".
2) Business plans are a required part of the advance assurance application. In the past, investor decks or business overviews were accepted. This is no longer the case, and a full business plan is required. For a quick guide as to what to include in your business plan, please check out our free eBook called "The Sapphire Guide to Writing a Business Plan", as featured on our website.
3) The Risk-to-Capital condition is now in effect and applicable to any investments made from the 15th of March 2018 and onwards, which means that investments made from that date will be able to avail of SEIS / EIS incentives only if the monies are deemed by HMRC to be "at risk". If you recall from my blog "Autumn Statement 2017 - SEIS and EIS implications" , HMRC now seeks to ensure that the schemes are used to incentivise risk capital placements, and any form of capital preservation strategy will no longer be allowed. The way HMRC will be assessing risk appears to be somewhat discretionary, with the application of a "principles-based test" on a case-by-case basis. We don't have further guidance on this assessment as of yet. In my opinion, the best way to try to ascertain whether your proposition would meet this risk-to-capital condition is to assess the level of other forms of incentivisation your company is availing. Look at whether your company has received governmental grants, sector-specific tax rebates, pre-sales, whether the proposed capital to be raised is for the purchase of fixed assets such as a building, or any other such structure that would reduce the capital at risk. HMRC should hopefully be releasing further clarification on this in the coming months, but currently it is still not clear.
4) The changes for "knowledge-intensive" companies will come into effect for investments made from the 6th of April, 2018 and thereafter. The increase of investment and time limits for companies that are "knowledge-intensive" was announced in the 2017 Autumn Statement. For investments made from the 6th of April 2018 the annual investment limit for the knowledge-intensive companies that are receiving investment will increase from £1 million to £2 million, and the qualifying firm will now be able to raise up to £10 million in one year under EIS. Also, there will be greater flexibility as to the age limit of a company if it qualifies as "knowledge-intensive" so that older enterprises may still be able to avail of the schemes.
Remember that the advance assurance process is provisional and does not form a contractual obligation for HMRC to honour. As such, it is important to note that in light of Royal Assent, advance assurance letters already received may not be honoured if the capital raised on or after the 15th of March doesn't adhere to this new "risk-to-capital" condition. EIS incentives are confirmed upon HMRC's issuance of the EIS2 and EIS3 certification (nothing new here, but I am just restating). And even upon receiving the EIS2 and EIS3 certification, the company must continue to trade in line with its business plan as submitted during the advance assurance application stage to ensure that HMRC does not have to claw back investors tax reliefs.
The above changes to the rules are only what I personally deem to be the major changes that affect most companies as at current. There will be further guidance, clarification and changes to come in the next following months, and it is fair to say we are in somewhat of a gray area at present, as even the above rules are still awaiting EU State Aid approval. The best advice I can give to anyone interested is to keep an eye on this space, and don't assume that the changes above are final and/or complete. We here at Sapphire try to increase awareness of what is going on, and the way we do it is by blogging. You can keep up to date on our latest blogs by subscribing to our mailing list
Written by Vasiliki Carson
As a partner at Sapphire Capital Partners LLP, Vasiliki specialises in SEIS and EIS schemes, R&D tax credit claims, preparing investor documentation and financial models for clients. Prior to co-founding Sapphire Capital, Vasiliki was with PwC and Goldman Sachs in Tokyo and New York. Contact her by email at firstname.lastname@example.org or view Vasiliki's full profile here.