Can your organization’s buyers declare EIS aid on a convertible mortgage? 

What are the EIS and SEIS schemes?

The Enterprise Funding Scheme (EIS) is likely one of the most widely-known reliefs for personal buyers wishing to make a tax-efficient funding in an organization. The scheme has been round for a number of years and provides advantages to the investor corresponding to earnings tax aid of as much as 30% of the price of the funding, and exemption from capital beneficial properties tax (CGT) on the eventual disposal of the shares the place the corporate continues to qualify for the required time period publish funding.

For investments in corporations which have been carrying on their enterprise for lower than two years, the same however separate Seed Enterprise Funding Scheme (SEIS) is accessible on the primary £150,000 of funding, permitting earnings tax aid of as much as 50% of the funds invested.

So, can your organization’s buyers declare EIS aid on a convertible mortgage?

This question is raised by many rising companies searching for to lift EIS or SEIS finance, who might have some buyers agreeing to take part in a funding spherical however the firm unable to difficulty the shares these days. For instance: the place the valuation of the corporate for the spherical is but to be decided and the corporate is ready to shut the spherical earlier than figuring out the value. While a non-EIS investor on this circumstance might present a convertible mortgage to the corporate, many corporations have questioned whether or not the identical could be supplied to their SEIS and EIS buyers (the place the principles concern each EIS and SEIS are related the shorthand ‘(S)EIS’ is used under).

One basic rule for (S)EIS is that money should be paid to the corporate for shares that are absolutely paid up as a way to receive (S)EIS aid, and (S)EIS aid is just not accessible the place somebody provides the corporate a mortgage which is exchanged for shares at a later date. On this foundation a convertible mortgage within the regular sense wouldn’t be a qualifying funding for (S)EIS functions.

Nevertheless, case regulation on (S)EIS has proved that there is no such thing as a requirement for the corporate to difficulty shares instantly as soon as the money has been raised, offering it’s clear from the outset that the money is paid to the corporate for shares. On this foundation it’s attainable for the investor and the corporate to enter into an Advance Subscription Settlement (ASA) which can, partly, have a few of the flavour of a convertible mortgage with out requiring the corporate to difficulty its shares instantly. An identical state of affairs has been used within the US for a few years as a Easy Settlement for Future Fairness (SAFE).

An ASA is just not a mortgage to the corporate and can’t have any proper to its compensation or for the investor to obtain curiosity on the quantities superior. It ought to, nonetheless, be attainable for the investor to have the ability to subscribe for the shares at a reduction on the value per share in the primary spherical, which can be thought of to offer the impact of a return on the superior funds.

HMRC has not produced steerage with regards to ASAs however we’re conscious that they’ve seen many such agreements being entered into by corporations searching for (S)EIS finance. We perceive that HMRC’s present place is that an investor investing via an ASA wouldn’t be prohibited from making a declare for (S)EIS aid the place the phrases for the advance buy have the shares issued inside one yr of the association, the truth that it isn’t a mortgage is outlined, and the opposite necessities of claiming (S)EIS aid are in any other case met. Ought to the corporate be trying to obtain Advance Assurance in relation to a potential (S)EIS elevate, the phrases of the ASA must be despatched to HMRC with the applying.

An ASA wouldn’t be appropriate for all buyers because it carries a further stage of danger: the qualifying interval for (S)EIS aid is three years from when the shares are issued and never from when the funds had been superior. If the corporate goes into liquidation earlier than issuing the shares (or simply after) then this could possibly be problematic and it might not be anticipated that the (S)EIS earnings tax aid can be accessible. The ASA is just not appropriate for buyers who’re on the lookout for an precise curiosity bearing return and the choice to transform, who might worth these rights over and above any tax aid afforded below the (S)EIS.

Because the tax guidelines regarding the (S)EIS are complicated, it is suggested that formal tax recommendation must be obtained for any firm wishing to enter into such an settlement and any documentation is written up by the corporate’s attorneys.

Paul Twydell is a company tax director with chartered accountants and tax advisers, haysmacintyre.  Contact Paul at ptwydell@haysmacintyre.com or on 020 7969 5556.