SEIS and EIS advance assurance applications: Dos and don'ts for your business plan - Jonathan Lea Network

SEIS and EIS advance assurance applications: Dos and don’ts for your business plan

SEIS and EIS Advance Assurance Applications: Your Business Plan

This blog post aims to set out what your business plan / pitch deck document should (and should not) include when you are preparing to submit an SEIS / EIS advance assurance application to HMRC.

We regularly advise new start-up companies on both SEIS and EIS advance assurance applications, as well as already established companies that are seeking to raise investment pursuant to EIS. We have also successfully sought advance assurance from HMRC on behalf of knowledge intensive companies and companies that are raising funds outside of the seven-year basic age condition.

We are therefore used to receiving business plans / pitch decks from businesses at various stages of development and from companies operating in a multitude of different markets and industries.

Below we explain the basics of what your business plan should include as well as highlight points that you should avoid mentioning within the document (based on our previous experiences with HMRC and our in-depth knowledge of the SEIS / EIS rules).

What your business plan should include

Your business plan needs to set out clearly what it is that your company does and the gap in the market that it is trying to fill. For example, if you have developed a technology platform, your business plan should state clearly the problem / dilemma that the platform is intending to fix.

Your business plan should be written in plain English so that it can be easily understood by the HMRC inspector reviewing your Company’s application. You should therefore avoid using complex language or sector specific terminology (i.e. ‘jargon’) and assume that the HMRC inspector reviewing the application has no knowledge about the sector that your company operates (or intends to operate) in.

Describe the activities that your business carries out on a day to day basis. One of HMRC’s requirements is that ‘details of all trading or other activities to be carried on by the company’ are outlined clearly in the application. The business plan gives you a good opportunity to meet this requirement and describe your business, outline its trading activities, identify the market it is going to be (or already is) operating in and detail the products / services it is going to provide to its customers.

HMRC will be particularly interested in how the company is going to make its money and will want the business plan to set out the company’s revenue / income streams.

Something that you should be aware of here is that one of the excluded activities contained within Venture Capital Schemes Manual 3060 (VCM3060) is that of receiving royalties or license fees. If part of your company’s revenues are or will be attributable to receiving royalty and / or license fees, you will need to make this clear in the business plan. What you would then need to do is use the wording in VCM3060 to argue that your company comes within the waiver to this general exclusion. We have previously received advance assurance from HMRC on behalf of numerous companies where we have had to put forward such arguments and so the fact that your company receives royalty / license fees as part of its revenue will not necessarily preclude it from being a qualifying company under the SEIS / EIS.

You should identify in your business plan any patents, trademarks (or other intellectual property rights) that will be attributable to the company and who will own those rights. It is also a good idea to outline the number of full-time employees that the company will have at the time that it raises the investment monies and issues the shares to qualifying investors. This is because a qualifying company under the SEIS must have no more than 25 ‘full time or equivalent’ employees at the time of the share issue and this number under the EIS is no more than 250 of such employees.

If any work is to be outsourced you should identify what work is being outsourced and to whom – bearing in mind that if your company is going to be outsourcing a vast amount of its activities or a significant proportion of them, this will decrease your company’s chances of receiving advance assurance from HMRC (as explained further below).

The business plan should not be overly detailed and therefore you need not go into scrupulous detail regarding any work to be outsourced / subcontracted (the majority of this detail should be contained within the covering letter submitted as part of the advance assurance application). Something to be aware of here is that  VCM60260 states that if the majority of the activities carried on by the company are subcontracted out (or outsourced – although this wording is not used by HMRC in the VCM), this is likely to, in HMRC’s view, constitute a “disqualifying arrangement”.

Specifically, VCM60260 states as follows on this point: “Each case will be considered on its own merits, but factors pointing to a decision not to grant advance assurance on the grounds that there may be ‘disqualifying arrangements’ are likely to include (without necessarily being restricted to) cases where the following apply: … the transactions to be entered into by the company will involve the company paying all or most of the monies raised by the share issue to a party to whom it has subcontracted work or from whom it has commissioned work in advance of that work being done, whilst the company will not be paid by its customer until work has been completed, where it seems likely that these arrangements exist as part of ‘disqualifying arrangements’”.

In addition, VCM60260 states that “disqualifying arrangements” are likely to also include cases where: “the majority of the activities required to fulfil obligations to customers will be carried out by persons other than employees of the relevant trading company (i.e. the company making the advance assurance application), or will be carried on by employees of the company but other than in their capacity as such…”.

Importantly, the final paragraph of VCM60260 reads as follows: “For instance, the fact that the company subcontracts work as part of its normal trading activities will not prevent HMRC giving an assurance if the subcontracting agreement is not part of ‘disqualifying arrangements’”.

From this wording we can deduce that HMRC will not disqualify a company from the schemes where subcontractors are used (as this is common / standard practice across the majority of industries). The point that you must stress if you will be outsourcing / subcontracting is that the company is not outsourcing / subcontracting all (or mostly all) of its activities and also that it is not using SEIS / EIS monies to pay off subcontractors.

In your business plan you should also highlight the size of the market in which your business operates (or will operate) and also identify your company’s main competitors (if there are any – which there may not be if your product / service offering is particularly bespoke or unique). It would also be beneficial if you can also clearly identify your customers / target market. This shows that the company has undergone market research and is seeking to enter (or has already entered) a real market with a tangible, identifiable target market (i.e. it is not a ‘shell’ company that has been set up purely for the purposes of attracting SEIS / EIS tax reliefs with no intention of actually operating in a market or offering products and / or services to customers).

Providing such evidence to HMRC will strengthen your application as it demonstrates to HMRC that, given the amount / strength of competition within the market and the overall size of the market in which your company is operating (or intends to operate in), the investor’s capital is significantly at risk and therefore the risk-to-capital condition is met.

We regularly see in our client’s business plans a ‘team profile’ section. This can be as simple or as detailed as you like. HMRC will want to know who works for the company (and their roles / titles). If you have a small retained team then pictures of your individual team members followed by confirmation of their role / title and what they do for the company is a good starting point. If you have a large retained team it would clearly be impractical to list all employees and so in such a case just list the founders / directors of the company and introduce them and their backgrounds.

Your business plan should give some background information about its development which has led it to the investment stage. You could for example include a company timeline showing the date that the company was incorporated and when it began trading (if this was after incorporation) and show what the company has been doing up to the point that the application is being submitted. You should make clear whether or not the company is currently trading. If your company has not yet began to trade that is not an issue, you just need to make that clear in the business plan and (if possible) state when the company will (or at least when you intend it to) commence trading.

One of the most important aspects of your business plan will be demonstrating to HMRC how the company intends to grow and develop over the long-term. You should outline this as clearly as possible for example by setting out the company’s plans to recruit additional full-time staff in the future, its intention to enter into new geographic or product markets or specifying new revenue streams that it will pursue in the future. Explaining how your company will use the SEIS / EIS investment monies and showing HMRC how such expenditure will lead to the company’s long-term growth and development is a key part of the business plan as well as the advance assurance application generally.

As highlighted above in this blog post, the business plan does not need to be overly detailed. You should therefore avoid containing lengthy / complex / incomprehensible (to the layman) financial accounts / forecasts within the business plan. A simple three-year cash flow projection / forecast summary is required (i.e. three-year profit and loss projections) and this should be kept brief, laid out in a simple way and most importantly should be easy to understand. You have to include such financial information within the business plan and so make sure that this is included.

As above, HMRC will want to know where the investment monies being raised pursuant to SEIS / EIS are going to be spent. For example, say that your company wishes to raise £250,000 pursuant to both SEIS and EIS. In such a case, your company’s business plan should include a simple Excel spreadsheet (or equivalent) providing HMRC with a granular breakdown of how those investment monies will be spent by the company – for example on developing the company’s product, meeting marketing costs and / or paying staff salaries.

HMRC’s rules state that “A company must not raise more money than it needs in order for investors to obtain tax relief”. Therefore, if you state that you are seeking to raise £250,000, you should provide an Excel spreadsheet detailing exactly where that full amount of £250,000 will be spent. If your spreadsheet shows that you only require £200,000, HMRC would undoubtedly pick up on this and would revert back asking for an amended spreadsheet or revised investment target figure. You should also make clear in the business plan that the investment monies are only going to be used / put towards qualifying business activities.

Please note that the new SEIS / EIS checklists that are now required to be completed and submitted to HMRC as part of any advance assurance application provide, in relation to the amount of money the company intends to raise: “You must give a good estimate of the amounts to be raised, to reconcile with the business plan and financial forecasts. We will not accept applications stating figures such as ‘up to £5 million’”. Therefore, the expenditure spreadsheet / table detailing how the investment monies will be spent must contain a definitive figure.

HMRC do require a set of the company’s most recent accounts to be provided as part of the application. These should therefore not be set out in the business plan but instead sent as a separate attachment. If the company is newly incorporated and / or has not yet began to trade it will not have produced a set of accounts and you can simply confirm this in the advance assurance application form (we regularly adopt this approach when acting on behalf of start-up companies and HMRC have never taken issue with this in our experience). HMRC will not expect you to put together a set of accounts for your company as part of the advance assurance application.

Always include a summary of your investment / funding plans and requirements. Investors will want to know such information and most importantly (for the purposes of the SEIS / EIS advance assurance process), HMRC will too. You should avoid declaring that the company is (or will be) SEIS / EIS eligible before HMRC have granted advance assurance. The whole reason behind submitting the advance assurance application is to obtain the right to advertise your company to potential investors as SEIS / EIS qualifying. HMRC inspectors tend to respond negatively if you advertise your company as qualifying under the schemes before they have granted advance assurance. You can of course highlight in the business plan that the company intends to submit an advance assurance application in order to become SEIS / EIS eligible (and make clear that approval is pending or is currently under consideration by HMRC).

If desired, you could also insert a slide to the business plan / pitch deck highlighting to investors the risk that they will be taking when investing in the company (i.e. a ‘capital at risk’ disclaimer). You could highlight that investment in shares in an unquoted company carries many risks and that the investors may lose their entire investment. In addition, you could make clear that the investors should consider the risks involved before deciding to invest in the company. You can outline points such as the fact that the company’s profit / loss projections may not be accurate and profits may not materialise, that there is no guarantee of a return on an investment and the fact that the shares are unquoted means that it is difficult to obtain valuation information and to fully assess the extent of the risk involved. Your investors should also be made aware that there is no established market for the sale of unquoted / unlisted shares and so selling their shares for a reasonable price (or at all) to a third party outside of the company’s existing shareholder base may be impossible.

Your business plan should also clearly indicate whether any follow-on funding will be required by the company in the future. You need not specify how much follow-on funding the company may require in the future, but it is worth indicating that this may be required even if only in general terms.

It is worth noting that VCM60220 states that “Any assurance supplied to a company is given only on the basis of the information provided, see VCM60050. HMRC does not generally check the accuracy or completeness of the information. It is the company’s responsibility to ensure it meets the scheme rules and provides statements and evidence supporting its view that the company is eligible to receive investment under the scheme. HMRC will highlight any obvious errors or potential failures; otherwise HMRC will generally accept what is said in the application”.

With that being said, within the business plan you will still have to ensure that the information contained within that document is accurate and true to the fullest extent possible. In VCM60220, HMRC stress that: “An advance assurance based on limited disclosure will not be valid and investors cannot rely upon such advance assurance when deciding whether to invest in a company. An investment reliant on an advance assurance based on inadequate disclosure cannot be assumed to being a qualifying investment. If HMRC subsequently finds that a company was not eligible for investment because the company had not made a full disclosure of relevant information then any compliance statement will be rejected or, if later, any tax relief given will be withdrawn”.

Potential pitfalls and detail that your business plan should not include

Be careful when using the words ‘partners’ or ‘partnerships’ in your business plan – given that these words carry certain legal meanings under UK legislation. On this point, VCM13150 states as follows: “During recent consideration of the EIS legislation HMRC has revised its view of how the legislation has effect in relation to partnerships. HMRC considers that the relevant legislation at section 183 of the Income Tax Act 2007 has the effect of disqualifying a company where the relevant trade, preparation work or research and development, is carried on by a company in partnership or by a limited liability partnership of which the company is a member. This is because where any of these activities are carried on in partnership or by a limited liability partnership; there are persons other than the issuing company or a qualifying 90 per cent subsidiary of that company carrying on the activity”.

Avoiding the words ‘partners’ and ‘partnerships’ is therefore advisable. If your company will be entering into these kinds of arrangements with other companies, it would be best to describe such  companies as “co-collaborators”, “distributors” or “suppliers”.

One of the requirements under the SEIS and EIS is that the company must have no pre-arranged exits (this is confirmed in VCM12080). VCM12080 provides as follows:

No relief is available in respect of shares if the arrangements under which they were issued, or any arrangements which otherwise relate to or are connected with the issue, include:

  • arrangements which might in any way lead to the disposal of the shares, or of other shares in the company,
  • arrangements which might lead to the cessation of the company’s trade, or of any trade carried on by a person connected with the company,
  • arrangements for the disposal of some or all of the assets of the company or of any person connected with the company.

This rule is intended to ensure that the company is capable of carrying on its trade indefinitely under its existing ownership. There is a let-out for arrangements, of the kind which might be found in a company’s Articles of Association, which merely ensure that if its trade fails the company can be wound up in an orderly manner”.

Importantly, VCM12080 provides that: “The rule does not stop the directors of a company from indicating in advance to potential investors how they envisage that shares in the company might be disposed of at some later date”.

You should nevertheless avoid mentioning investor exits within the business plan that is submitted to HMRC as part of the advance assurance application. If you include such wording in the business plan then your company is unlikely to qualify for SEIS / EIS. Of course, an investor’s intention when injecting cash into a company is to achieve a capital gain on their investment further down the line, however HMRC do not like these to be pre-arranged and in existence before the company has raised funds or even began to trade. To be safe and certain you should avoid mentioning exits and reiterate the point within the business plan that given the level of risk involved, the investors are more likely to lose their investment than to make any kind of capital gain on it.

VCM60260 provides that HMRC are likely to decide not to grant advance assurance on the grounds that there may be disqualifying arrangements in place in cases where: “the prospectus, information memorandum, brochure or similar offer document (i.e. the business plan / pitch deck) describes the investment opportunity in a way which suggests that the investment is not high risk. This may include, for instance, statements to the effect that the investment is low-risk or lower risk than other EIS, SEIS or SITR investments or that there is a high likelihood of the investor’s capital being preserved…”. You should therefore ensure that your business plan contains no such wording.

As mentioned at various points throughout this blog post, make sure that the business plan is not unnecessarily lengthy and complex. Around ten pages is a good size with not too much text on each page / slide. You should ensure that it is sharp and to the point and that it contains (among other details) the points highlighted in this blog post (and doesn’t include the points / detail that we have flagged as inappropriate).

HMRC automatically rejects emails to the email address where the attachments exceed 8MB in size. You should therefore make sure that the business plan (and all other documents that you submit as part of the application) are small enough in size so as to comply with this requirement. You can use file compression software on various websites online, however please be aware that there is no way of knowing where your files will be sent during the compression process and you should therefore try and compress the files internally (particularly where the attachments contain sensitive / confidential information – which is almost always the case).

General tips to consider

The JLN recently attended a webinar hosted by Paul Grant, founder of The Funding Game, called “How to create a pitch deck to secure investment offers”.

Generally when drafting a pitch deck, Paul advises that you should stick to the “10, 20, 30” rule. This means that:

  • It should take you no more than 10 minutes to present the pitch deck;
  • The pitch deck should contain no more than 20 slides (Paul advises that a good rule of thumb is somewhere between 12 and 14 slides); and
  • The font size on each slide should be no larger than 30 points.

In addition, you may find these sources useful:

HMRC guidance on business plans

VCM60220 states that “All companies seeking a relevant investment must have a business plan. This should be a new document produced for advance assurance, but one that has already been provided or is made available to potential independent investors as part of any company’s normal commercial arrangements for seeking investment from the market. The business plan is a key document to persuade independent investors to invest in the company and should contain the same level of detail as any potential market investor or lender, for example a bank, would expect to see”.

VCM60220 further provides as follows: “The level of detail (contained within the business plan) will vary depending on the size of the company, its development stage and the amount of investment the company is seeking. The larger the company and/or the investment, the greater the detail that will be required for example in terms of turnover and profit forecasts. All business plans should explain how the money is to be spent, including the relevant business activity, and give details of any follow-on funding that is likely to be needed”.

The guidance manual then concludes by stating that: “The business plan should also explain how the investment will lead to the company’s growth and development in terms of, for example, increased turnover or employees”.

HMRC have issued guidance on producing business plans, which can be found here. HMRC’s guidance contains links to free business plan and cash flow forecast templates which are useful starting points. For example, you could access:

In addition, you could access the Start Up Donut website and get detailed information and guidance on how to write a business plan.

Every business plan that we see is different due to each company being unique. If you instruct us to submit an SEIS / EIS advance assurance or compliance statement application on your behalf we would always conduct a detailed review of your business plan and suggest amendments or deletions where appropriate in accordance with the SEIS / EIS qualifying criteria.

If you would like to discuss submitting an SEIS / EIS advance assurance application, or if you would like to know more about the process and our fees, we offer a 20-minute no cost, no obligation call as a starting point. If this is of interest, please get in touch via the email address to schedule a call with one of our fee earners.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2023. 

About Jonathan Lea

Jonathan is a specialist business law solicitor who has been practising for over 18 years, starting at the top international City firms before then spending some time at a couple of smaller practices. In 2013 he started working on a self-employed basis as a consultant solicitor, while in 2019 The Jonathan Lea Network became a SRA regulated law firm itself after Jonathan got tired of spending all day referring clients and work to other law firms.

The Jonathan Lea Network is now a full service firm of solicitors that employs senior and junior solicitors, trainee solicitors, paralegals and administration staff who all work from a modern open plan office in Haywards Heath. This close-knit retained team is enhanced by a trusted network of specialist consultant solicitors who work remotely and, where relevant, combine seamlessly with the central team.

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