New S/EIS 'Risk to Capital' rules make a mockery of investing in Start Ups

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 - 

https://www.indiegogo.com/projects/ecf-buzz-the-crowd-investors-information-centre/x/19804529/

Now we know - Thevibe or Vibe Tickets went bust because Luke Massie, the founder, failed to pay HMRC and owed them £57,000 on going into administration

The more we get to know about Thevibe's demise and resurrection as Vibe Tickets, the less we like it.

Not all the information is out - yet. But the initial filing shows Luke Massie's company owed HMRC PAYE and NI £57k. For a small business that suggests some seriously poor management. All his excuses turn to dust as we find out the real reason he called in the administrators. Debts to HMRC, once out of control, do tend to have this effect. 

We note that the total deficit is only £87k so the 'sale' of the company back to Luke Massie should leave that cleared up. We will have to wait and see. We will also wait to see if his promise of free shares in his new venture (well the old one rewrapped) Vibe Tickets, for all Crowdcube SHs, comes to pass. 

If I was an investor, which I wouldnt be as his ability to run anything is highly questionable, then I wouldnt want shares in this company, I'd just want rid of him.

Luke's PR keeps on purring as he gets Steve Bartlett - the wonderkid of SM - to interview him about how the poor lad has been hard done by in the press. FFS get a life. The interview is over a hour long and riddled with inconsistencies, lies and half truths. Bartlett should be ashamed of himself peddling this type of nonsense, when he removes comments and refuses to respond to Qs about why he has ignored the facts. Mind you, Bartlett says he thinks one of the most valuable lessons an entrepreneur can have is cold calling selling double glazing - essentially nuisance calling which is or should be illegal. The guy is a flake. Maybe one day Steve you will join the grownups and make some money but from looking at your accounts it wont be anytime soon. 

Phew - At long last Little Brew is shut down by the Government.

Little Brew raised £110k back in 2013 on Crowdcube. Its last filed accounts were for YE Sept 2014. So you can imagine it will come as some relief to Crowdcube investors that they can at last claim their loss relief 3 years late. 

Its a typical Crowdcube story. Great enthusiast Stuart Small, liked beer. He saw all these other beer enthusiasts raising money on Crowdcube and eureka, he invented Little Brew. He had no experience in brewing or business but then in 2013 on Crowdcube you couldnt get through half a pint before you had been given £100k. Of course all of this was and still is, orchestrated by the promotion of magic bean like profits and ROI. 

The fact that the company has been trying to close down for 4 years is something of an oddity. Is that a record? Eventually HMRC have stepped in and closed it will be on 18 June 2018. 

Thank god that's over. 

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. 

The odd tale of non investment in Crowdcube as 'funded' Dine In crashes out.

He has a point.
Dine In Ltd raised just over £300k on Crowdube in January 2014. According to Crowdcube's own list of funded companies.

18 months later the company was toast - liquidated. Nothing unusual there you might think - most Crowdcube funded pitches end this way.

But this one is slightly different. In the Statement of Affairs filed almost a year ago to the day, there is no reference to any shareholder capital. Nothing, zilch - the £300k is just not there. The full list of shareholders is there with their shareholding but the 'total amount called up' column is like the Pearl Harbour sky on 7th December 1941 - full of zeros.

Are any of the the 90 shareholders that Crowdcube still claim put in £300k, out there? Would you let us know what this is all about?

Either the Statement of Affairs is wrong, which if this is the case and the founder signed it, which he did, he will be in breach of pretty well everything. Or the money was never actually collected (possibly as in the case of 88 Delicious) and Crowdcube have failed to correct their records and have a whopper on their FCA regulated site. Neither or both would be a surprise.

The last set of accounts filed, before the Crowdcube raise, show over £60k in shareholder funds already in the company. Yet in the Crowdcube pitch financials, this figure is zero. We have no idea what happened to this. In an article which seems to compare the CEO Graj to the boys behind Deliveroo here , written post collapse and post Crowdcube raise, the story is a sad tale of missed opportunities. Graj is now working for Uber in Singapore. The liquidation has not moved on in 12 months. This smells like another Crowdcube mess to us.

It does fill you with confidence in the systems we and HMRC operate under.

Why HMRC data cannot be trusted.

We have been saying this for while. The data that HMRC hold on companies is not accurate. Filed Accounts and Annual Returns for SMEs are often fictitious.

Here's a classic example.

Bnktothefuture is an outfit we have mentioned before. We know they are liberal with the truth so it was a fair bet that their accounts wouldnt stack up. However we didnt expect the errors to be so blatantly obvious.

Taking its 3 years of accounts filed at Companies House to date, it should be easy to follow their progress. The way this works is that they only have to file a brief balance sheet annually and this is presented with the previous year's BS in the opposite column - sort of acts as an anchor from the start of the year to the end of the year.

What BTTF have done is move the anchor point each year so that whatever picture they want to paint comes out. So the filed original accounts for 2012/13 when they appear on the filed accounts the following year have substantial changes and so on to 2015. The original filing is not corrected to reflect these changes so we have a total mess.

This means that all of the accounts for this company are complete nonsense and its anyone's guess what the real accounts would say.

Of course this only matters because with the new Equity Crowdfunding, the information from HMRC on companies can be essential for making credible judgements.

The liberalisation of SME reporting was intended to ease the burden and expense of red tape. No auditing required, only basic balance sheet details wihtout notes are filed. It does make sense providing the SME's dont abuse it. It was never intended to work with ECf however.

Its impossible for HMRC to check all these annual accounts and the evidence is very plain that they dont. We are free wheeling down the hill towards the cliff.

HMRC official paperwork is a mess

We have mentioned before how HMRC's records are not accurate.

SME's can file their own unaudited accounts and annual returns and the problem is either one of dishonesty or simple inability. Either way you cannot rely in the accounts and returns that are filed at Companies House. HMRC certainly do not check them.

Here is a typical example. Peach Lettings raised money on Crowdcube over a year ago. Their AR01 filed recently shows only one shareholder - the founder. On inspection the return does say that the company had raised money by crowdfunding, but then fails to list the shareholders. According to the AR01 the company has share capital of over £1m. This is of course complete nonsense.

We have no idea if Peach Lettings did or did not complete the raise on Crowdcube. They say they did and it completed according to Crowdcube's records. But the only official documentation shows it didnt happen.

Where does that leave investors in ECF? Shouting for help.

Another Crowdcube success misses its projections

There is a good reason why you hear this cry on the London Underground - to prevent you from breaking your neck. Gaps of most kinds are unwelcome. Gaps between business projections and real sales are especially onerous if you are an investor.

Affresol Ltd has just filed accounts to YE May 2014. Affresol raised £135,000 on Crowdcube in Summer of 2013.

The company projected it would be well into profit by May 2014. Accounts just filed show a loss of £460,000 for the year to May 2014 and a total accumulated loss of just shy of £1.5m. This figure is almost double the company's estimate.

The company currently has its own ECF pitch on its website, raising some £400,000. So were the other shareholders asked about their dilution, as this new share issue certainly wasnt mentioned back in the Summer of 2013.

It strikes us that you simply cannot build a sustainable business using plans designed to sell the company's equity. These are sales presentations not business plans. Affresol is just one example out of many we have on file, of a company encouraged to over estimate its sales in order to complete its pitch. Surely at some stage the crowd will realise this and stop investing?

This would be shame in our opinion - ECF could be a very valuable life line for SMEs. Just not the way the current model is run.

Are the FCA up to the job?

What are we to expect of the new financial regulator in the UK - The FCA?

A good level of basic competence must be a given. If we want them to prevent the type of fiasco that helped cause the 2008 crash, we need them to be at least awake on the job.

Late last week we sent a notification to them that a website was offering financial promotions without FCA approval. This is in most circumstances contrary to the Financial Services and Markets Act 2000. It was in this case.

The reply we had is copied below

After reviewing the firms website, I can inform you that there are circumstances where unauthorised persons are communicating financial promotions to clients in the UK which will be governed by the financial promotions order under section 21 of the Financial Services and Markets Act 2000 (the Act).

Section 21 (2) of the Act sets out the circumstances in which an unauthorised person can communicate financial promotions as set out in our handbook in PERG 8.9.1.

This is on the basis that the information has been checked and approved by an authorised person. 

If you have evidence that this is not the case you should let me know and I will refer it to the appropriate team within the FCA.

The firms website seems to indicate that their financial promotion has been approved by Crowe Clarke Whitehall.

Firstly this reply gets the name of FCA approval firm completely wrong - it should be Crowe Clark Whitehill. The company mentioned in the reply does not exist.

Secondly Crowe Clark Whitehill has not approved this site's promotion. They did approve a promotion by a company with the same name in 2012, as the current site now rather sneakily points out. This was under a different set of rules as set out by the then FSA (now the FCA). Since then the site has changed and is now run by a company of the same name, incorporated in the Cayman Islands and run out of London. It has no approval from any UK authorised FCA accredited company - according to the FCA Register. This is why we sent the notification to the FCA in the first instance.

All the information is on the FCA's own register so it shouldnt have been too difficult to check it. Clearly for this particular employee, it was.

It doesnt bode too well for the future if they cant get something this simple right. 

Why are UK taxpayers funding films?

Syndicate Room, a UK based ECF platform that specialises in linking VC investment with crowd investment, has just completed a pitch for £1.8m.

'Salty' will be a new film directed by Tomb Raiders' Simon West. Salty Ltd has been set up to make the flic and then distribute the profits to shareholders. Its based on a novel by Mark Haskell Smith, an American. The novel's reviews are very limited, so not exactly a best seller.

Ignoring the tiny $10m budget, the fact that West has never made a comedy and that reports suggest some of the $10m will come from pre sales of the film (that is some assumption), we would like to highlight the tax issue.

EIS was set up by the UK Government to stimulate private investment in UK businesses. Any UK tax payers can obtain an instant 30% rebate on their income tax for that year, against the amount they invested. Participants then have to hold these shares for three years. HMRC control this and the seed investment version SEIS. It is not free money - the total rebate from ECF and SEIS will have to be shared by all UK taxpayers.

Simon West is currently working on a remake of the The Blob - it seems a few projects have slipped in recent years  - for example Johnson the Rock in Protection, which as far as we can tell has never been released. So Salty will not be made anytime soon. Reports say that West wanted to try a non block buster approach. We wonder whether the shine from Tomb Raider and Con Air hasn't become a little tarnished?

Is this really what EIS was designed to do, promote one off, high risk, meaningless projects? What if the budget, which is by far the smallest West has ever worked with, proves unworkable? The project will fail and the £600,000 of UK taxpayers money will be wasted. Salty Ltd will have failed before it even begins.

The film is to be shot in exotic locations,; the novel is based in Thailand. So no real benefit to the UK there. The author is American. The stars - who knows if it will get that far.

Syndicate Room make a feature of the fact that investors can reclaim the tax in this tax year. What will Salty Ltd have achieved by 5 April 2015? The potential return is only there because of this 30% rebate.

If people want to feel part of the Hollywood Set, then let them. But dont use UK taxpayers money when we are constantly being told this is a time of austerity.

PS - readers of our other posts will know that a similar one off project Water Babies, which raised £1m, drowned without trace. At least Water Babies was a UK inspired and UK based project.