The government’s SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) programmes have been a huge success. At SeedLegals we can see that they fuel the UK’s early-stage startup economy, with the vast majority of £500K and lower funding rounds being powered by angel investors and syndicates looking for SEIS or EIS tax benefits.
Many of those investors will only make their investments after the company has obtained confirmation from HMRC that the company is eligible for SEIS or EIS. That’s known as Advance Assurance. It’s clearly proving hugely popular, with HMRC now taking 8 weeks or more to process these applications.
To try to reduce their workload and reduce processing times for this important pre-approval document, starting January 2nd this year, every Advance Assurance application must now include the names of investors intending to invest in that funding round or the application will be rejected. Applications which do not contain their investor’s details will now be deemed as ‘speculative investments’ and rejected.
HMRC has introduced this change to reduce the demand for the Advance Assurance service. 30% of approved applications are speculative and don’t result in investment, and HMRC are aiming to limit applications only to those companies which have demonstrated investor interest — they’ve put together a helpful summary of their reasoning (PDF).
What this means for startups
While the goal of reducing application approval times is laudable, this change is going to be a significant problem for startups because it creates an unhelpful Catch-22: the startup needs to know who their investors will be before they can obtain Advance Assurance, and investors will often only commit to investing after the company has obtained their Advance Assurance!
Previously you could apply for Advance Assurance many months before your funding round so you’d have everything in place before you approached investors, but you’ll now need to have at least some level of interest from specific investors before you can lodge your application.
With this change being new and not well publicised so far, most startups won’t be aware of these changes and their upcoming Advance Assurance changes will be rejected.
SEIS/EIS, the easy way
At the risk of sounding a little salesy, I should point out that my company, SeedLegals, has a way to easily navigate this new change to the rules.
SeedLegals has launched an SEIS Application Portal where you can get investment ready, enter the details of your potential investors and complete your SEIS Advance Assurance application.
The SeedLegals system will import the potential investor information from your upcoming funding round and automatically generate the HMRC SEIS application form and a cover letter populated with all the information required, including the investor details, ready to send to HMRC. Even better, the SeedLegals team can review your application to make sure it’s correct, so you don’t lose weeks following an HMRC rejection.
Once your Advance Assurance has been granted (if you still want to apply for Advance Assurance given the recent changes, rather than just crack on with your funding round), then you’re all set to complete your funding round dramatically faster and cheaper than using a law firm. SeedLegals lets you build your Term Sheet, Shareholders Agreement, Articles and all the other documents needed to close your round. The documents created by the platform are designed to be SEIS and EIS compatible so your investors can be assured that they’ll get their SEIS / EIS benefits.
How you can help
Founders need to be aware of these changes before submitting their Advance Assurance applications, and get at least some investors speculatively on board so that they’re able to put some names and addresses to their Advance Assurance applications.
Investors will require a leap of faith on their part to either soft-commit to an investment and wait 6-to-8 weeks for that Advance Assurance to come through, or just forgo Advance Assurance. It’s not legally required, it’s purely there for investor comfort. Then they can just get on with making that investment in a company they believe in, and work with the company to claim the SEIS and EIS benefits later.
And for our part, we’ve contacted HMRC to discuss how, by providing them with standardised Advance Assurance applications complete with a pre-checked documentation pack and pre-approved Articles of Association wording (particularly the all-important Liquidation Preference provisions), we can help bring those approval times down to days, not weeks. Which would be good for all.
Please share this article widely so everyone is aware of these changes.