Are we heading for an EIS disaster?

A very recent Crowdcube raise by Verto Homes illustrates what maybe a hidden problem with EIS.

Verto Homes successfully raised £1.6m on Crowdcube this week. They had no advanced assurance from HMRC on EIS eligibility. However they told investors that they expected to be eligible.

In the course of the pitch, the question of EIS came up. In reply to questions, the founders of VH stated that they had taken advice from the Mill Consultancy's Jerry Davision and that he had informed them that they would be EIS eligible. Jerry worked at Crowdcube previously.

One of the proscribed activities for EIS is property development, which is defined as being involved or having been involved in a piece of land that is then developed for housing or commercial use. Its a grey area as construction companies are eligible providing they are not involved and have never been involved in the purchase and sale of the land they are building on.

One other proscription is that the company must not be providing services to another company that is offering a proscribed service if both companies are controlled by the same person/people.

HMRC retain the absolute right to enforce their own judgements in these matters retrospectively.

In the case of Verto Homes, we dont know yet what HMRC have decided. Verto Homes have distanced themselves from their recent developments - Towan Heights for example. Towan Heights LLP are the developers. But if you dig a little, there seems very little difference between the two. Towan Heights LLP was set up in December 2012 as Verto Group Developments Towan Heights LLP. The sole members at this time were the sole directors and founders of Verto Homes. Only in 2015 did the name change and other members join. Also at this time, the two founders terminated their membership to be replaced by their Verto Homes company, as a designated member. Then in May 2016 Verto Homes resigned as a member to be replaced by the the two founders again. So the development company, Towan Heights was set up by the same people as Verto Homes. Verto Homes and Verto Construction (also controlled by the same two) use their services exclusively to develop land that is owned by Towan Heights and other LLPs or companies that are also controlled (at least in part) by the same two people. 

Another Verto Homes development, according to their website, is Hilgrove Mews. Hilgrove Mews Ltd was incorporated in 2015 and its sole directors are the same two as for Verto Homes and the founders of Towan Heights LLP. 

That looks like a pretty close relationship. Of course the application to HMRC prepared by Verto Homes' expert, may not have filled out all this detail. The bottom line is even if HMRC now grant advanced assurance, they can at any stage change this is if it becomes clear to them that the original application was incorrect. The only people who will suffer from any change will be those who have already utilised their EIS relief as HMRC claim it back with interest. 

You might well ask what the equity crowdfunding platforms do to help here. Well in the case of Crowdcube, not much. We think that in cases that are clearly on the line, advanced assurance should be a minimum before any claim by the pitch to EIS relief can be allowed. But we know this wont happen as it would hinder Crowdcube's deal flow. 

One final point on this. If during the first three years of trading (post investment) for whatever reason, the company changes its operations and these changes take them into a proscribed activity, then EIS relief will be voided and any taken will have to be returned with interest. As we have seen with the recent Wool and the Gang 'exit', Crowdcube investors and it appears Crowdcube,  have no control over what the company chooses to do. So this is yet another potential time bomb. 

It might all end up in a bit of a mess.