Investors looking for opportunities in EIS-approved companies or funds often come across the phrase ‘advance assurance’, which means HMRC has taken an initial view over whether the specific enterprise meets the eligibility criteria.
In essence, investors need verification that, if they proceed with an investment, the business will be accepted by the EIS and be able to provide tax reliefs and other incentives linked with investment into early-stage, unlisted and smaller companies.
While there is no obligation to apply, many investors will only consider EIS investments with advance assurance status since this provides some level of confidence that their investment will qualify for beneficial tax treatment.
Please note that the information below is for general informational purposes only. For further clarification, please seek professional tax advice before making financial decisions.
EIS Qualification Criteria
As a venture capital scheme, EIS encourages investment into younger businesses with good potential for growth but that find it difficult to secure funding, given the risk associated with organisations without an extensive balance sheet value, trading history, or workforce.
There are several rules and conditions, but in summary, a business can offer EIS-eligible capital investments provided it:
- Does not own more than £15 million in assets.
- Has less than 250 members of staff.
- Has not been trading for more than seven years.
Note that these conditions change for knowledge-intensive companies, such as those focused on innovation, research and development.
Other requirements apply, such as the business being permanently established, UK-based, and offering shares with capital at risk. Companies raising capital through the EIS cannot raise more than £5 million per year or £12 million in total.
The Value of EIS Advance Assurance
If a business decides to use the EIS to raise financing, it can apply for advance assurance, as the name suggests, in advance of the raise. There are several reasons to do so, but primarily this shows prospective investors that there is a good likelihood their investment will be valid and eligible for the varied tax advantages.
However, investors should be conscious that advance assurance is not a guarantee, and if the business’s trading circumstances change in the interim or HMRC decides to reject the application once investments have been made, there is the potential that tax reliefs will be withdrawn or unavailable.
Advance approval is also based solely on the eligibility of the company, not the investor. For example, if an investor becomes involved in the running of the business, they may waive their right to claim tax relief.
EIS Rules for Investors
Investors can generally take advance assurance as an indication that there is a strong probability that, provided the business remains within the qualification thresholds and does not change its operations, it will remain eligible.
Certain industries and sectors are excluded from EIS and other venture capital schemes, such as those involved in accountancy, steel production, farming or care homes, but it should be clear from the business plans whether any major changes are likely to mean they operate in an excluded space.
The other factor that may be just as relevant for investors is to check whether they individually are eligible for EIS tax reliefs since ineligibility will forgo their right to claim reliefs, exemptions and deferrals regardless of whether the company remains EIS compliant.
As we’ve mentioned, an investor cannot have close ties with the business, so for instance, a director cannot invest in their own business and claim tax reliefs against their invested capital.
Minimum Share Retention Periods
The investor needs to retain their EIS shares for three years and will have to repay tax reliefs claimed if they sell or transfer their shares before this period ends. Shares must be ordinary shares, paid in full upfront, and have no preferential access to dividends to qualify for the full extent of tax reliefs available.
UK Tax Position
Income tax relief on EIS shares is one of the most attractive incentives, but the investor must have an income tax liability to offset the relief. Although they don’t need to be residents in the UK, they cannot claim tax relief if there is no obligation owed.
Finally, to be able to claim EIS tax relief, the investor cannot be using the investment as part of a tax avoidance strategy or scheme – investments have to be genuine and made for commercial reasons.
HMRC can withdraw advance assurance at any stage, up to the point of approval, but it is still possible to become ineligible for EIS, whether because the company loses its verification due to changes to its finances or sector or the investor fails to meet the terms required to claim the full value of tax reliefs on offer.