Property based companies and advance assurance approval
How we helped a property related business obtain EIS advance assurance from HMRC
We assist our clients with SEIS and EIS advance assurance applications on a daily basis and have developed a good niche in this area. In the first six months of 2019 we have already submitted over 40 SEIS/EIS advance assurance applications on behalf of companies.
We were put in touch with a company that was launching a new urban spa concept business by one of our contacts at a successful EIS nominee fund.
The company in this case was seeking to raise funds which it intended to put towards fitting out the property that it had acquired, and was to operate from, and to also pay staff salaries and marketing costs.
As the founders of the company had operated a similar business (as a concession within a large department store) for a number of years prior to starting their new company, this was always going to be a challenge to get past HMRC as in order to qualify under the EIS regime, the company’s business must have been trading for less than seven years. The founders had since ceased operating out of the department store and had incorporated a new company to operate their new urban spa business – but the owners still wanted to use the old trading name.
Ever since HMRC introduced the ‘risk-to-capital’ condition in 2018, it has become harder to receive advance assurance from HMRC, making each case all the more challenging for the team (we nevertheless continuously receive advance assurance for our clients on a weekly / monthly basis).
The risk-to-capital condition is comprised of two parts, these being that:
the company in which the investment is made must have objectives to grow and develop over the long term; and
the investment must carry a significant risk that the investor will lose more capital than they gain as a return (including any tax relief).
These two points seem counterintuitive and involve us having to put forward complex and detailed arguments in order to satisfy HMRC that a company in any given situation meets the condition. HMRC are likely to reject an application if there is anything within the documents supplied to them as part of an advance assurance application which indicates that the company may not be able to meet both elements of the condition.
How we helped / what we did
In this case, we took our client through our internal procedures in the usual way, requesting all relevant information from them (such as a business plan / pitch deck document explaining the company’s business, details of the company’s shareholders, latest company accounts and so on).
One of the key areas we had to focus on was to make detailed arguments in our covering letter explaining how the business of the new company was distinct from the business of the previous company in order to prevent HMRC coming to the conclusion that this was a continuation of a previous trade which meant that the company did not come within the seven year rule.
We also had to explain to HMRC that the company was not carrying on rental activities (which is not a qualifying trade under the EIS regime), but was instead operating as a qualifying trading business in setting up and managing various concessions within its own building.
HMRC subsequently responded to us approving the advance assurance application, and we were commended by the client and the EIS nominee fund for our perseverance.
Despite our best efforts to avoid this we are seeing in more and more cases that HMRC are responding to advance assurance applications requesting further information and asking additional questions about the company and its business. In some cases the questions they ask can require a lot of thought and consideration of / reference to the specific EIS rules and guidelines is always necessary. We often find that provided you give HMRC detailed and persuasive responses to their queries, you can usually get the application approved.
As a result of the advance assurance confirmation received our client was then able to raise a significant sum from investors keen to back a good tax-advantaged investment opportunity.
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