EIS guide

32 RULES FOR INVESTORS AND QUALIFYING COMPANIES The growth and development test This was introduced in the 2015 Budget, based upon an examination of the business plan. Generic indicators of a focus on the growth and development of a business include proposals to: • Increase revenues over time; • Increase its customer base; • Increase the number of employees. In essence, the money must be employed to deliver something that enables the company to grow rather than preserve the status quo such as simply paying pre-existing day to day expenditure. As part of the advance assurance process, companies need to state in their business plans how they meet the growth and development requirement. Advance assurance Companies that are seeking subscriptions under EIS may seek an assurance from the Venture Capital Reliefs Team (VCRT) at HMRC that a prospective investment is likely to be eligible, before issuing the shares. The advance assurance service is discretionary and non- statutory. There is no requirement for a company to obtain an advance assurance before receiving an investment or issuing shares to investors. The advance assurance service allows the company to provide information about its intentions; about its structure and activities, about the proposed investment and about how the monies raised will be used. As mentioned, there is no obligation upon firms to go through this advance assurance process, but it does provide an opportunity to spot any problems before the shares are issued and an assurance from the VCRT is useful for companies to show to potential investors. In addition, HMRC requires a similar level of detail as an advance assurance application when the company submits an EIS1 application (if it has not had advance assurance), so providing this information in advance may well speed up the EIS1/EIS2/EIS3 process. Advance assurance is NOT a guarantee that a share issue qualifies or that the company will continue to qualify. If something important was not disclosed to the VCRT or, if between receiving advance assurance and the share issue something changes, it may be that the share issue or company is no longer qualifying. However, if nothing has changed, advance assurance is normally considered binding on HMRC (although EIS tax reliefs are also subject to the circumstances of the individual investor, which HMRC will not opine on in advance). From early 2018, HMRC has declined to consider speculative applications. Confirmation of who the likely investors are is required before HMRC will give an opinion. If details can’t be provided HMRC rejects the application. HMRC has also confirmed that it does not intend to identify which companies qualify as KICs at the time of advance assurance review unless this status is relevant to the proposed investment (for example if a prospective investor is interested in investing over £1 million into the company in a single tax year, or if the company is raising more than £5 million from EIS investors in a tax year). 33 RULES FOR INVESTORS AND QUALIFYING COMPANIES Rules for EIS-qualifying companies The changes made in two Budget statements in 2015 were primarily made in order to ensure ongoing compliance with EU State-aid rules. The changes announced in the 2017 Budget were aimed at creating a tighter focus on innovative SMEs most in need of funding. MAXIMUM AGE No limit 7 years unless total investment represents more than 50% of the company’s average turnover over the preceding 5 years and the company is using the funds to enter a new product or geographic market, or it received previous risk finance within its first 7 years LIFETIME CAP FROM ANY COMBINATION OF VCT, EIS OR CERTAIN OTHER GOVERNMENT INCENTIVES No limit £12m 12-MONTH INVESTMENT LIMIT* £5m £5m EMPLOYEE LIMIT (FTE) Fewer than 250 FTE Fewer than 250 FTE USE OF EIS MONEY FOR ACQUISITIONS OF BUSINESS Allowed New rules to prevent EIS funds being used to acquire existing businesses or part of a business (incl. intangible assets that have already been used in a trade) GROWTH AND DEVELOPMENT TEST No requirement Requirement that all investments are made with the intention to grow and develop business EXISTING SHAREHOLDERS No requirement For EIS only, a requirement that investors are independent from the company at the time of the first share issue (excl. founder shares) MAXIMUM NUMBER OF TRADING YEARS No limit 10 years. From 6 April 2018, a KIC is able to use the date from which its annual turnover exceeded £200,000, instead of the date of its first commercial sale, when determining the date fromwhich the end of the initial investing period is calculated 12-MONTH INVESTMENT LIMIT* £5m £10m LIFETIME CAP No limit £20m EMPLOYEE LIMIT Fewer than 250 FTE Fewer than 500 FTE *(ALL TAX ADVANTAGED VC) Pre November 2015 Today KNOWLEDGE-INTENSIVE COMPANIES The current rules, both pre and post the final 2015 and 2017 Budgets and subsequent Finance Acts, are summarised below for reference: