Investors, like everyone else, don’t like taking unnecessary risks.
When it comes to SEIS, one of the ways to decrease the risk for your investors is to file an SEIS Assurance Advance Form. This provides a semi-binding declaration that the company will qualify for SEIS relief.
There are a couple of caveats worth noting, though.
What the Assurance Advance Form will provide
The normal way to go through the SEIS process is to file a compliance statement, which HMRC then authorises, which gives you the right to issue a compliance certificate to your investor, who then can use that in their self-assessments. An Assurance Advance Form (hereafter, AAF) is not meant to be a substitute for approval of the compliance statement.
What the AAF represents is HMRC’s agreement that, on the basis of the information provided, the company appears to be qualifying. HMRC is very specific about whether this binds them to accept the compliance statement later:
It is important that all information given is correct, as the HMRC officer considering the application will be relying on it. It is not part of considering the application to check the accuracy of the information.
Providing correct and complete information has been given, HMRC will normally be bound by any assurance given, even though this assurance is not statutory. But if it transpires, when the form EIS1 or SEIS1 is submitted, that this was not the case, HMRC can and will refuse to accept that form.
In other words, the only thing that HMRC’s response to the AAF can prove is that your company does not qualify for SEIS. If they say it doesn’t, you can still easily disqualify yourself before the filing of the compliance statement.
HMRC also notes that:
It is not necessary for the request to identify the intending subscribers, and no assurance as to the availability of relief to a particular subscriber can be given either to the company or to the subscriber in question.
In other words, they can tell you whether they think the company looks like it qualifies, but that doesn’t mean the investors haven’t disqualified themselves in some way that the company doesn’t (or does!) know about.
So much for assurance!
Making good use of better than nothing
Still, this is better than nothing, but only if it’s used properly.
Given that the only strong signal from an AAF is a negative one, the correct way to use the AAF is, paradoxically, the opposite of what you might do normally. Instead of trying to qualify, you should do your best to expose any nook or cranny of the business that could disqualify it.
The reasoning is simple: if one of those details does disqualify the business, it may be fixable. If it is fixable, you better fix it before the shares are issued, otherwise they may not qualify. If it’s not easily fixable, and you find out about it early enough, perhaps the solution might even be to simply re-incorporate properly, in a way so that you do qualify.
What you definitely don’t want to do is hide some critical piece of information which you’re dubious about. If you do this, then your AAF effort is worthless, since if HMRC finds out about it sometime within 9 years or thereabouts after the shares are issued, they can withdraw the tax relief to your investors, and possibly fine you if you were aware of the issue but didn’t let them know. The fine to the company appears to be limited to £3k, but the investor penalty amounts to the tax owed, plus interest. This means an investor who originally saved £50k of tax could end up with a sudden £65k tax bill 9 years later. Ouch.
Everything but the kitchen sink
So the best way to use this form is to provide any information you believe might be relevant, and also to engage with HMRC as and when they respond, to make sure they are genuinely happy with the information provided and don’t feel like there was something else you could have provided.
The AAF explicitly allows you to provide “any other information relevant to this application”. Make use of that.