How older companies can qualify for EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

This week I’m looking at the ways that companies can qualify for EIS despite being outside of the ‘initial investing period’. There are a few ways to do this, but there are also a number of areas to watch out for where mistakes that prevent EIS qualification can be made.

What is the initial investing period?

Broadly, the initial investing period is the seven years following a company’s first commercial sale. (Knowledge Intensive Companies (“KICs”) have more generous rules which allow them a longer initial investing period and several other relaxations: for more information see the blog my colleague Ryan wrote.)

The first commercial sale can sometimes be tricky to pin down. It’s defined in the European Commission’s Guidelines on State Aid as “the first sale by an undertaking on a product or service market, excluding limited sales to test the market”. The key point to bear in mind is the “limited sales to test the market” point, as the first time a company makes a sale (for example of a prototype) does not necessarily mean that the seven year clock to receive EIS will immediately start ticking after this.

Receiving EIS investment after the initial investing period

There are three conditions that allow companies to access EIS investments after the initial investing period – conditions A, B and C. Your company only has to meet one of these.

Condition A – past S/EIS received

Funding under condition A is available if a company has already received past S/EIS investment before the end of the initial investing period and:

  • the new EIS funding is used for the same qualifying business activities as the first S/EIS funding was; and
  • the company’s business plan at the time of the initial funding foresaw the need for follow-on funding.

It is the second condition that is a frequent issue. Where companies suspect that they will require further funding, this should always be specified in the business plan – even if the quantum of future funding required is not specifically known at that time.

(NB: where the initial S/EIS was received before 18 November 2015, the business plan does not have to show the need for follow-on funding.)

Condition B – new product or geographic market

Condition B allows companies to receive EIS funding where:

  • the amount of the EIS funding, together with any other EIS, SEIS, VCT, SITR or other Notified State Aid funding (e.g. Innovate UK or SMART Grant) within a 30-day period, is at least 50% of the company’s average annual turnover (calculated by averaging the company’s turnover for the past five years); and
  • the money raised by the EIS funding must be used for entering a new product market or geographic market).

The first test is often overlooked as companies focus on the second. It is important to note that non-EIS investment does not qualify. Scottish Investment Bank match equity funding, for example, is not a Notified State Aid and does not qualify.

As the EIS funding needs to be spent entirely on the new product or geographic activity (and companies need to show how the money will be spent), companies should not try to raise more money than they need for the new activity, as spending money on other business activities would cause them to fail the condition. On the other hand, the first part of the test may mean that companies need to raise a large investment if they have succeeded in generating significant turnover over the past few years – so it is important that companies carefully consider exactly how much EIS funding they require.

To be considered to be entering a new product market, a company must show that it is targeting a new customer base, and not just releasing a new product which its existing customers would use.

In terms of entering a new geographic market, companies need to show that the conditions of competition are appreciably different in this new area. Expanding to a new city is not likely to meet this test, but expanding to a new continent likely is.

The key point for a company to prove with relation to condition B is that it would not be possible to use its previous track record to assess the potential of success for its new activity. Companies should aim to demonstrate to HMRC that they are effectively setting up a new business, not just slowly expanding.

Condition C – past EIS funding under condition B

Condition C is, luckily, a lot simpler, and is simply for companies that have raised EIS funding under condition B and now wish to raise follow-on funding. The rules are the same as for condition A – remember the importance of specifying the need for follow-on funding in the business plan!

In Summary

Securing EIS investment after the initial investing period of 7 years may look like a daunting process, so if you think that this might apply to your company it’s best to start thinking about it sooner rather than later. That way, parts of the tests are less likely to catch you out in the future.

If you would like further advice regarding the availability of EIS relief, please get in touch with us.

Brexit is done, so roll on amendments to EIS

This post is part of our Entrepreneurial team’s regular series of blogs.

Many within the investment industry have been frustrated at the restrictions placed on SEIS and EIS by virtue of compliance with EU legislation.

Whatever your political persuasion – this article is deliberately apolitical – it is clear that Brexit offers an opportunity for HM Treasury to make amendments to the SEIS and EIS schemes, without breaching EU law. It would appear that with this in mind, the EIS Association (EISA) has written to the Chancellor and laid out proposals to improve these schemes.

SEIS is de minimis state aid, meaning that there were limits around the quantum of investment that could be received and also that EIS is a Notified State Aid, providing the EU with influence over its rules and application.

Such influence was most notably exercised in 2015 when HM Treasury instigated changes to EIS because it needed EU reapproval of the scheme. These changes included a termination date for the EIS scheme; a maximum age of the company requirement and restrictions on which investors qualified, how money was to be spent, and which companies qualified; and the promotion of “Knowledge Intensive Companies”. With the exception of the last point, these changes were not welcomed by most and fundamentally changed the investment landscape. In my opinion, for the worse.

The EISA’s letter, timeously issued in advance of the March Budget, sets out its recommendations for changes to these schemes. I applaud their actions, having written several articles in the past stating my desire for positive and progressive post-Brexit changes to the EIS scheme. Their recommendations, together with my own thoughts, are listed below:

Immediate change – i.e. from 3 March 2020

1. Increase the maximum level of SEIS investment from £150,000 to £250,000.

The majority of start-up companies we see seeking investment look for around £250,000 in their first investment round. As the rules currently stand, investors need to seek the first £150,000 to be SEIS and the remaining £100,000 to be EIS. The effect of which, to be compliant with the SEIS rules, is that the investment must be tranched over two days. This added complexity requires more detailed and correspondingly expensive investment agreements to be drawn up, as a result of which I have seen investments falling through.

Autumn Budget changes – likely to be around mid-November

2. Replace the Age Restriction with a more appropriate threshold

5 years on, the maximum age restriction is still the EIS change that prompts the most questions to our @LINC Scotland EIS Helpdesk from investors. In a nutshell, older companies do not qualify unless

  • i) they have previously taken EIS investment and are seeking to further fund that activity; or
  • ii) are trying to do something very different and are raising a significant sum to finance it.

I see half a dozen good companies every year which need investment and cannot get through these rules. They are left out to dry. The EISA do not advocate simply throwing open the doors to all companies, but replacing this (unfair) test with a (fairer) test that reflects the size, not the age, of the business.

3. Ministerial assurances that EIS will continue beyond 2025

If we are to succeed as a country, investment in innovation is critically important. Banks simply will not lend to most early stage businesses, so these businesses need to turn to investors to get going, fund their growth and fund their expansion. The EIS scheme is a significant job creator, with 4 new jobs created for each £1m invested according to the EISA. When the 10-year scheme limit was enacted, much consternation was expressed. We are now over half way through that window and need to have assurances that the scheme will continue.

4. Reducing the admin burden

We live in a digital age in which all PAYE information is instantly known to HMRC; all VAT information is reported instantly to HMRC; and all accounts and tax returns will soon be instantly reported to HMRC.

By comparison, EIS is reported through a combination of a manually-completed document that prompts HMRC to issue a PDF certificate, authorising the company to prepare and issue forms to the investors who then can manually complete it and submit in the tax returns or directly to HMRC. This is archaic. It should be possible for the post-EIS investment form to be digitally uploaded and, once accepted by HMRC, each investor’s tax recorded updated to record the investment.

Final thoughts

In addition to the above, EISA also recommends HM Treasury investigates how money held in pension funds can be used to fund EIS and SEIS qualifying companies and how to raise the profiles of EIS and SEIS investments.

The EISA letter is first class. It is a well researched, well presented and well thought-through request for support. Support that the government can provide without massive cost to the exchequer, and that will enable the economy to grow.

C+T nominated for Best EIS/ SEIS Tax Adviser award

We are delighted to announce that Chiene + Tait has been nominated for the Best EIS/SEIS Tax Adviser award at the EISA Awards 2020, the annual celebration of the #EIS, #VCT and tax efficient investment industry and community.

This will be the fifth year the firm is nominated, having been ‘Highly Commended’ for the last four years, the only firm in Scotland to have ever achieved this Tickets for the Awards ceremony can be found here: https://bit.ly/2EXu4eg

EISA Awards Nomination 2020

How (a background in) sport has helped me settle in at C+T

Playing sports has always played a huge role in my life, filling the majority of free time I have. I feel the experiences I have encountered through playing sport have allowed me to begin developing the skills necessary to be successful in my professional career. However, in order to develop my skills further, I needed real exposure to a professional environment which is where C+T comes in.

Going back to this time last year, summer 2018, I was about to take on one of the most exciting challenges, one that on paper seems very different to the challenge here at C+T, but surprisingly had many similarities.

Setting off on my own on the 18,000km+ journey to Christchurch, New Zealand to play rugby with one of the country’s most prestigious teams is something I had previously only dreamed of. The complete unknown loomed from my first step on NZ soil. Everything was new to me; the people, the culture and the environment in general were a huge change – the term ‘thrown into the deep end’ springs to mind!

You might be wondering what this has to do with an Entrepreneurial Tax Internship in Edinburgh? The feelings I faced on day 1 here at C+T were similar, albeit I wasn’t throwing myself around the office (most of the time). Entering a new, professional environment comes with the same feelings of uncertainty, which I have come to realise must be cherished and taken full advantage of. The opportunity to do something new and different allows you to develop and grow as an individual, both in the office, on the field and in life generally.

After somewhat settling into life here as an intern I have been exposed to a vast variety of taxes, tax reliefs and tax procedures from CGT to EMIs to completing corporation tax provisions. I cannot speak highly enough of the patience and understanding I have had from everyone thus far; I assume that an intern asking questions every five minutes can be a bit irritating (to say the least!), but if you don’t ask, how do you ever learn?

I have thoroughly enjoyed being exposed to the R&D team at C+T, learning about legislation regarding tax relief has allowed me to understand the substantial impact that correct R&D advice can have on a business. Listening in on calls and seeing first-hand the interactions between clients showcased the friendly, but professional manner that C+T hold themselves to. Working with the R&D department, I got the chance to learn and understand the new and unique technological advancements each client makes, something I found to be a fascinating!

One final thing that stands out for me about C+T are the people. They say the people make the firm and I believe that to be true here at C+T. Like the Kiwis, I received a warm welcome, they really made me feel like part of the team from day 1, showing me that C+T put an emphasis on developing relationships both internally and externally.

Overall, I am looking forward to furthering my knowledge and developing my skills in my final two weeks at C+T and I am excited for any future challenges that may arise both in the office and the field.