Understanding SEIS and EIS Advance Assurance for Startups and Investors

In the UK, securing investment for early-stage companies can be challenging, but with the help of tax relief schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), startups can become more attractive to investors. These schemes offer valuable tax incentives that reduce the risks for investors, making them crucial for businesses looking to secure funding.

This guide will explain what SEIS and EIS advance assurance means for both startups and investors, as well as how companies can benefit from this assurance to attract more financial support.

What is EIS and SEIS Advance Assurance?

EIS and SEIS advance assurance are formal recognitions granted by HMRC to confirm that a startup is likely to qualify for tax relief under these schemes. This assurance helps investors feel more confident about the risks involved, knowing they are eligible for tax breaks if the company meets certain criteria.

For Investors: EIS and SEIS Advance Assurance

For investors, advance assurance is an essential part of ensuring that their investment qualifies for tax relief under either the EIS or SEIS. When a company secures this assurance, it receives a letter from HMRC stating that, based on the information provided, the company meets the eligibility criteria for these schemes. However, it’s important to note that this is not a guarantee that every individual investment will qualify for tax relief.

After the company issues shares, it must submit an EIS1 form to HMRC, which will then review and approve it. Once approved, investors will receive an EIS3 certificate, allowing them to claim the tax relief. However, any changes in the company’s situation could affect whether the investment still qualifies, so it’s essential to keep track of the company’s circumstances.

SEIS Advance Assurance for Investors

SEIS is designed specifically for early-stage companies, and the tax reliefs offered under this scheme are generally more generous than those under EIS. For instance, SEIS provides investors with 50% income tax relief, compared to EIS’s 30%. This makes SEIS particularly appealing to those investing in higher-risk, early-stage startups, often with innovative technology. The scheme attracts investors by offering higher tax incentives while helping startups grow and experiment with new ideas.

For Startups: How to Apply for EIS and SEIS Advance Assurance

Securing advance assurance is a crucial step for startups seeking investment. To apply for EIS advance assurance, companies need to submit an application via the official GOV.UK website or collaborate with third-party organizations that assist with the process. It’s vital for startups to provide a detailed compliance statement to ensure that they meet all of HMRC’s requirements.

The process for applying for SEIS advance assurance is usually faster than for EIS, but the company must still provide all necessary documentation to demonstrate its eligibility.

Required Documents and Information for SEIS/EIS Advance Assurance

When applying for advance assurance, startups need to provide a range of documents to show that they meet the eligibility requirements. These include:

• Company’s trading start date: The company must specify when it started trading. HMRC considers a company to be “trading” when it is undertaking activities with a view to making a profit.
• Details of any previous SEIS investments: Startups need to disclose any prior SEIS investment rounds.
• Potential investor details: This helps HMRC determine if there are serious investors lined up for the company.
• Risk to Capital condition: The company must demonstrate that investors are at significant risk of losing their investment while also having the potential for substantial growth.
• Recent bank statements or accounts: Proof of financial health, if applicable.
• Articles of association: The company must submit its latest articles, or the model articles if applicable.
• Pitch deck: This should include key information that highlights the company’s potential for growth and how it meets the risk to capital condition.
• Financial models: The company must provide balance sheets and profit/loss forecasts for the next three years.
• Grants received: Any government or university grants received must be disclosed, ensuring they meet the “de minimis” criteria.

Why Securing EIS and SEIS Advance Assurance is Important

For startups, securing EIS or SEIS advance assurance is often a requirement when approaching venture capital (VC) firms. Many investors and VCs will expect this assurance to be in place, or at the very least, in progress. Having this assurance signals that the startup is serious about its fundraising efforts and has taken the necessary steps to ensure the investment is tax-efficient.

The most significant advantage of obtaining EIS and SEIS advance assurance is how much it enhances the company’s appeal to investors. Investors are often attracted to these schemes primarily for the tax benefits they provide, but many also appreciate the opportunity to back innovative startups with high growth potential. Without advance assurance, a company might lose out on a substantial portion of potential investors who rely on these tax incentives to reduce the risks of their investment.

Conclusion

For both startups and investors, understanding the process of securing EIS and SEIS advance assurance is essential. Startups can increase their attractiveness to investors by obtaining this assurance, while investors can benefit from tax reliefs that reduce the financial risks involved in supporting early-stage companies. If you’re a startup looking for investment or an investor interested in these opportunities, securing advance assurance could be the key to making your next step a successful one.