Investors can take the risk out of a Seed Enterprise Investment Scheme (SEIS) stake with the confidence of HM Revenue & Customs (HMRC) pre-approval.
Investors and entrepreneurs are largely unaware that HMRC will give the nod to company that has taken the bother to check out whether the share offer is SEIS compliant before going to market.
The measure takes away a lot of uncertainty for investors and directors.
Investors do not have to identify their interest nor part with any cash before pre-approval is granted.
Directors can go to the market to pitch for cash knowing that their offering is more rounded-off having passed through the HMRC’s SEIS compliance process.
No tax guarantees
Advance SEIS approval does not guarantee investors will pick up their valuable tax breaks, but makes the eventuality a lot more certain.
SEIS companies do not have to apply for advance approval, it’s a free no-frills service offered by HMRC to make the start-up process easier for them, entrepreneurs and investors which irons out the wrinkles before any money changes hands.
Entrepreneurs file for advance approval with a written application that gives HMRC detailed information about the proposed start-up.
HMRC will not approve the business plan, but will indicate whether the structure of the business will allow investors to apply for SEIS tax reliefs.
Only the company can apply for advance approval, so investors who want to include this as part of their due diligence have to get written permission from the directors to approach HMRC.
Advance approval also has a couple of important points to watch for lawyers and investors scrutinising the start-up business.
Points to watch
HMRC grants advance approval according to the details of the share offer at the time of application. If the deal changes because an investor negotiates better terms or the directors change their stance, then the advance approval process has to start again.
The identity of any investors is not a part of the advance approval service. Their identity need not be divulged, but the approval is no guarantee they qualify for SEIS tax breaks.
For instance, an overseas non-resident investor is not eligible for any income tax reduction on issue of the SEIS shares.
“Any details on the advance approval notice are used to form the basis of our opinion of whether the company is likely to gain SEIS approval,” said an HMRC spokesman.
“The process does not require the company to tell us who the subscribers are and approval does not guarantee they will receive any tax reliefs under the scheme.”