What do the new EIS/SEIS stricter guidelines mean for crowdfunding?

Since HMRC brought in stricter guidelines at the start of the year in regards to providing prospective crowdfunders with advanced assurance of their EIS/SEIS eligibility, potential and existing clients have asked some questions. Here are some answers.

What is SEIS/EIS?

Put very briefly, the Seed Enterprise Investment Scheme / Enterprise Investment Schemes (SEIS/EIS) are tax incentive schemes providing up to 50% income tax relief for eligible individuals investing in a UK startup. The schemes are a real boost from the UK government for startups and growth companies seeking investment.

What is the Advance Assurance?

The HMRC’s Advance Assurance provides some certainty to investors that an investment opportunity is likely to qualify for SEIS or EIS.

An increase in applications for SEIS and EIS Advance Assurance caused HMRC to accumulate quite a backlog in the processing of these applications, with the average processing time running up to two months. But a third of those startups seeking Advance Assurance never went on to raise funds.

In an attempt to improve efficiency and reduce their backlog, HMRC issued stricter guidelines stating that they would no longer issue Advance Assurance for prospective applications.

What do the new guidelines say?

According to the new guidelines, “companies that have never raised an investment under one of the tax-advantaged schemes (the SEIS, EIS, VCTs or SITR) must demonstrate their intention, and their likely success in raising the money, by providing information about their prospective investors in their advance assurance application. Companies must have engaged with individuals or promoters who have agreed their investment plans are viable and are likely to attract investors.”

While we would always advise that prospective crowdfunders secure the backing of lead investors as one of the starting points in their crowdfunding preparation, the new guidelines made it hard to gauge when to put in an application for Advance Assurance.

What do these guidelines mean in practice for companies seeking to crowdfund?

If you are planning to raise funds on an equity crowdfunding platform, you will need to provide HMRC with evidence that you have engaged with and begun the screening process with the platform of your choice. You will need to provide some confirmation that the platform has recognised you to be a viable investment for its customers and that you intend to proceed with the raise.

We would also encourage you to provide proof that you have approached prospective investors and that negotiations are underway.

The good news is that as the assumption is that these new guidelines will speed up the processing time for applications, this shouldn’t affect the timing of your campaign launch in any way. In fact, you could even say it is an extra incentive to ensure you secure lead investment early on.