EIS rules and benefits for investors explained
Invest in EIS-eligible companies to get generous tax relief. We set out the rules and benefits for investors.
What is the SEIS / EIS Risk to Capital Condition?
Introduced March 2018, this subjective new condition has introduced a heap of new considerations for SEIS / EIS applicants, and is not something to be ignored! HMRC have now made it clear that this is a gateway test, which is the first consideration they will review on any application.
HMRC are clear, the Risk to Capital Condition relates to two separate parts:
As of recently, we are now seeing HMRC return applications with a long list of detailed questions, all pertaining to the above two requirements. So it’s best to get this right on the first application!
This test was initially thought to be targeted at Film production companies, however, HMRC are clear that this test is applied equally across all trades and activities.
It is essential that the Company demonstrate not just the objective to grow, but that this growth will be as a result of the SEIS / EIS investment. Some of the specific factors HMRC will consider are:
This second aspect of the condition is more concerned with the security of the company and investors funds.
Some of the essential factors HMRC will look at are:
This condition presents quite a balancing act for founders. On one hand, you’ll want to present the Company in the best possible light to investors. On the other, you’ll run into issues with HMRC if you are too idealistic about your projections.
The key is to be realistic about how you advertise the investment, is your Company really guaranteed to be bringing in £50m in revenue in the second year. Is there really no competition or risk factors?
The best question to ask yourself is: Does the company proposition appear so attractive to investors that SEIS / EIS is unnecessary to entice them? If so, you may have issues with the Risk to Capital Condition.
Unlike the other, more black-and-white, SEIS / EIS requirements there isn’t a singular statement or metric which will prove that you meet this condition. It is intentionally vague, and encompasses a range of considerations. Please see our detailed guide on what to include in a business plan for SEIS / EIS for more helpful tips on meeting this requirement.
If HMRC believe that your company is at risk of failing, they will inform you first, asking for more information on a range of relevant points. In addition, unlike the general rejections – when it comes to rejections based upon the risk to capital there is a right to appeal.
Of course, to avoid that happening, do reach out to us at SeedLegals using our chat feature if you have any further questions. We provide a full review of every SEIS/EIS Advance Assurance done on SeedLegals, so we are always happy to provide our input on your risk to capital eligibility, and make suggestions for improvement necessary!
Hit the chat feature in the bottom right corner of the screen to speak to a member of the SeedLegals team!