The new rules brought in the 2018 Finance Act to prevent the abuse of S/EIS tax reliefs for SMEs and start ups, are completely unworkable. We now have evidence of one case where advanced assurance has been denied on the basis that the company's plans showed they aimed to give investors a return.
Company X applied for advanced assurance (AA) under S/EIS tax reliefs for their current funding round. The company complied with all the standard criteria for these reliefs. However under the new 'risk to capital' criteria that came into force last year, HMRC has denied this company AA. The letter states -
''The exit provisions provided in the supporting documents are indicative of an arrangement whereby investors will receive a return of their investment'' - thereby contradicting the new rules.
HMRC have made it very plain that this 'risk to capital' criteria must be met as a first hurdle before any other conditions are examined. So if your business shows your investors getting their money back then you will not be eligible. That's the law.
'Risk to Capital' is 'defined' by the new rules as being the assurance that the risk of losing the investment is greater than the chances of it being returned. How you calculate these chances, which are based almost entirely on future events, is not discussed. What HMRC want people to invest in, are businesses that are more likely to fail than succeed. If you have one of these, then your investors will be eligible for tax relief. Makes perfect sense to us!
The full rules are here
The implication is stark. You cannot hope to get AA if you offer investors a business plan that shows at some stage in future, investors will get their money back. Note - this is not a return on investment - it is merely the return of the principle sum.
If we expand on this - companies now hoping to get AA on S/EIS schemes - roughly 100% of all companies using equity CF, then their plans must show that investors will most likely lose all of their money. That is so stupid as to be ridiculous. Who in their right mind seeks investment in a business knowing from the start that they will take that money and lose all of it. Then again, who invests using S/EIS reliefs knowing that they will certainly be making a lose.
There are many ways the Government could improve S/EIS but this isn't one. What we will now get - if this refusal is an indication of things to come, is companies creating a set of plans for HMRC and another set for investors. I do not believe I have ever seen a PD that assumes from the outset that all the investment will be lost.
We get this information to you as we have many contacts now in this sector and they are concerned as to the direction this is all going. When we launch ECFBuzz in July of this year - this sort of advice will be restricted to members - so why not join up now with a 50% discount here -