Avoid later phase EIS pitfalls

If you have previously obtained EIS approval, you will appreciate the importance of that relief to investors and you may be lulled into thinking you can replicate the previous application based on your business activities. While partially true, our experience as tax advisors to high growth companies, we support many businesses obtain HMRC approval to apply EIS relief for their investors and some of the common pitfalls for succeeding applicants include not presenting evidence to support the following:

1. The somewhat idiosyncratic pitfall is the understaking in difficulty test, with a definition derived from EU legislation that such as accumulated losses exceeding half of the share capital for limited liability companies and it meets the requirements for collective insolvency proceedings.  
2. There is an ongoing requirement for there to be a significant risk that the investor will lose more capital than they gain as a net return (including tax relief) and so capital preservation structures and guaranteed income streams may fail this test.
3. The assets tests are based on gross assets (before deduction of liabilities) before the share issue (which is one of the measures that can limit popular instruments like advance subscription agreements and convertible loan notes).
4. If your investors join the board, watch out that investors cannot be employees, which may include directors and this restriction can run for three years following the raise.
5. Watch out for the 30% rule, which can include equity and debt.
6. Knowledge intensive companies have more generous rules and it’s useful to know that qualifying criteria can be applied retrospectively to extend the time period.

Meeting these requirements and other ongoing requirements (see more here) requires a combination of expertise in tax combined with financial and commercial lived experience. 

Our work is delivered by combining professional standards of the Institute of Chartered Accountants of England and Wales with lived experience. If you want to expect more from your advisors, contact us.