How Swoop helps businesses jump hurdles to secure investment

HMRC’s Advanced Assurance scheme can place businesses in a ‘chicken-and-egg’ situation. Working with Swoop can help a business easily attain the coveted AA status

AUTHOR: Andrea Reynolds, Founder and CEO at Swoop

When a business is looking to raise investment finance in the UK market, one of the first questions they will be asked by investors is: will my investment qualify under SEIS or EIS?

If the answer is ‘no’, for some investors, that will be enough to move on, however attractive your business might otherwise be. 

Why? 

This question relates to two avenues for UK tax relief, known as Seed Enterprise Investment Scheme (SEIS) for very young businesses and Enterprise Investment Scheme (EIS) for the more mature businesses and the venture capital trust scheme. HMRC offers Advanced Assurance, a letter that confirms a business qualifies under one of these schemes. 

These tax breaks are very important and go beyond the value of the initial investment: investors must hold the shares for three years, but thereafter, if they sell them with a capital gain, there is no tax on the capital gain. If the shares are inherited, there is no inheritance tax paid on those shares either. 

This blog will explain what SEIS and EIS are and give general rules to get you started. We will then look at Advanced Assurance, why it can be difficult to attain, and how Swoop can help you secure investment in your business more easily. 

For more detailed information, click here.

Seed Enterprise Investment Scheme (SEIS)

SEIS is for businesses that are two years or younger from the date of their first commercial sale and have gross assets less than £200,000.

GOOD TO KNOW: all age criteria related to these investment schemes fall on the date of the first commercial sale, not on the day that the company was incorporated.

Some businesses do not qualify for the scheme, such as gambling and property, due to the low risk of capital attached to them. 

Any qualifying business can raise up to £150,000 under SEIS with any individual investor allowed to invest £100,000. The great attraction of the scheme is that on the investor’s tax return, they are allowed to deduct 50 percent of that investment against their income tax bill.

Enterprise Investment Scheme (EIS)

EIS is for more established businesses of up to seven years from the date of first commercial sale – though for highly innovative businesses there may be some flexibility on this in recognition of the years that may have been spent in research and development. It’s not unusual for a business that is 10 years old to qualify for EIS. 

The business must have assets of no more than £15 million and employ fewer than 250 staff. 

The amount a business can raise and the tax benefits to investors are also different: 

The business may raise up to £5 million per year (£1 million per investor) under EIS and up to £12 million over the lifecycle of the business.

The investor is allowed to deduct 30 percent of that investment against their income tax bill.

GOOD TO KNOW: SEIS and EIS underpin some valuable tax planning for high net worth individuals who invest in growth businesses in the UK.

All about Advanced Assurance

From an investor’s point of view, it is vital that the business they are investing in meets the criteria for SEIS or EIS as many of them use the tax break as a motivating factor to invest in the first place. To make your business more attractive to investors, you may apply for something called Advanced Assurance. 

This is a letter from HMRC that confirms that in the event that you raise under this scheme, it looks like you are eligible and that it is highly likely for your investors to receive the tax relief they are hoping for. 

To apply for Advanced Assurance, you’ll need to complete a form from HMRC. You will need: 

• Certificate of incorporation
• Brief business plan and financial model
• Investor deck that highlights that the business falls with within a qualifying trade
• Share register (if you have shareholders)
• Proof that the business meets what is known as the risk of capital condition

‘Risk of capital condition’ shows that the funds are being used for growth and development of a business that has a higher level of risk (you will remember that certain sectors, such as asset-based businesses, do not qualify under these schemes as they are deemed ‘low risk’).

It cannot go into asset backed businesses, where there is a lower risk. And so you need to be careful to call out that condition as I’ve just described. 

Once you have sent these documents to HMRC, you may be asked further questions about intellectual property and any potential investors that the company has already lined up. Generally, the process to receive Advanced Assurance takes between six and eight weeks. 

Why does HMRC want to know about potential investors?

HMRC has recently tightened up its process of issuing Advanced Assurance because they found they were completing the process for companies that did not then go on to raise funding. This has the potential to open a ‘chicken-and-egg’ scenario for businesses: they can’t get investors without Advanced Assurance, and they can’t get Advanced Assurance without investors. 

This is where Swoop can help. 

At Swoop, we have already curated matches for the business and supply a list that can be used for the application to HMRC. We do a lot for businesses looking to raise equity investment – getting Advanced Assurance is just one way that we are able to take what can be a difficult, time consuming process and just make it easy. 

Getting in touch with Swoop early in the process of seeking investment means that you can save your business a lot of time and money by having experts on hand who have seen the process from beginning to end. Swoop sits between businesses and investors and gives value to both sides.