Changes to the procedures for applying for Advance Assurance (‘AA’) for proposed EIS and SEIS investors are intended to deter ‘speculative’ applications, but, along with the ‘risk to capital’ condition introduced by FA 2018, may also create a ‘Catch 22’ situation for some start-ups, as Ken Moody explains.
The main procedural change is that it is now necessary when applying for AA to identify the potential investors, which is where ‘Catch 22’ comes to mind as potential investors may not be willing to consider until AA is received.
The AA application is now completed online but needs to be printed, signed and filed together with supporting documents. The new application form asks for a few additional details and all boxes must be ticked otherwise an error message appears. For example one of the items of information requested is “any” subscription agreement, so you have to tick that box and if there isn’t one then you obviously can’t append. As in: ‘yes we have no bananas’.
The accompanying guidance at https://www.gov.uk/guidance/venture-capital-schemes-apply-for-advance-assurance which contains a link to the application itself, states that:
You’ll also need to provide an explanation of how you meet the risk to capital condition, which may include the details of your potential investors.
In fact you have to tick the box stating that the names and addresses of prospective investors are provided. In the case of investments sought through fund managers or crowdfunding it is not sufficient to simply give the names of the managers or platforms. It is necessary to provide evidence (e.g. letters, emails) that the fund manager has agreed to work with the company or the company “has engaged with and begun the screening process with the crowdfunding platform.”
The risk to capital condition (see Tax Insider October 2018) is introduced as s 157A ITA 2007, in relation to EIS investments, and in almost identical terms at s 257AAA and s 286ZA in relation to SEIS and VCT investments. This requires that it is “reasonable to suppose” that the company has objectives to grow and develop its trade long-term and that there is a “significant risk of a loss to capital greater than the net investment return” (taking account of the income tax relief). When deciding if the risk to capital condition is met, HMRC will look at the company’s:
- sources of income
- use of subcontractors
- marketing of the investment opportunity
- relationship with other companies
These factors are listed in the legislation at s 157A(3)), s 257AAA(3) and s 286ZA(3). In an application for AA I recently assisted in under the new procedures I went through the list commenting on the significance of each factor, resulting in the longest covering letter I have drafted for AA!
If the required information relating to the investors is not provided HMRC will simply respond that the application has not been reviewed and will not be looked at until the further information has been received (within two months).
My understanding is that fund managers generally are reluctant to consider potential investments unless AA has already been obtained. Catch 22 again it seems, though the situation may change since everyone will be in the same boat in future.
- There appears to be no reason why, if even only one individual investor can be identified, AA may not be sought for that investment, provided that the company is a qualifying company and the money raised is to be used for a qualifying purpose. This is simply following the legislation though AA would only apply to that investment and a further application or applications may be necessary for later investments.
- It should be remembered that even though the new procedures require prospective investors to be identified AA does not imply that any individual will qualify for relief, which was always the case.