ASA vs CLN: Key differences explained
When looking to raise investment, choosing the right legal structure is vital when considering your long-term plan.
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You’ve done your research.
You know that the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) are some of the best ways to attract investors to your business, with impressive tax relief on offer for qualifying investments.
But in order to qualify, companies must adhere to certain eligibility criteria. One that often catches companies out is around company control and subsidiaries.
So, if you’ve got a holding company, a group ownership structure, or another business registered at Companies House, this could be worth a read.
To qualify for SEIS or EIS, your company must be:
If your company is a part of a group of companies, or have another business registered alongside your trading company, you need to frame it carefully.
The above qualifying criteria needs to be upheld throughout period A (SEIS) or period B (EIS). Period A is a specific time window starting at either:
Period A then runs until three years after the share issuance, or until the business ceases trading - whichever comes first.
Period B goes from:
If your company fails the control or independence test at any point during period A or B, you could lose SEIS/EIS status, even if you were compliant when the shares were first issued.
In HMRC’s terms, control means one company, or a group of people have the power to direct or influence the affairs of another company. This could be through:
If you, or a group of connected people or companies, can effectively run another business, HMRC may consider that you control it.
In light of this, qualifying companies must not:
HMRC has a fairly broad definition on what could constitute arrangements for the purposes of control. These include:
Even if these aren’t legally enforceable, HMRC makes it clear that this may be enough to disqualify you. So if you’ve had discussions about setting up a future group structure, transferring control, or acquiring another business, this could be something you’ll need to navigate.
On the flip side, the test also seeks to uncover if you are under the control of someone else.
You won’t qualify for SEIS if:
There are no exceptions to this rule for SEIS, even if you’re the one who set up the parent company.
For EIS, your company must not be a subsidiary at any time during Period B.
During this time, your company must not be under the control of another company or another company and its connected persons.
A subsidiary is a company that is controlled by another company, usually a parent or holding company. In practical terms, this usually means owning more than 50%, or having control over the board.
It’s pretty common in the UK startup world, however, there’s a catch for those raising through SEIS/EIS:
If your SEIS-eligible company controls a subsidiary, that subsidiary also has to meet the same trading conditions as your SEIS company. If not, your eligibility is at risk.
You (probably) can have a subsidiary if:
In other words, if the subsidiary is just an extension of your core trading activity, such as a second office or sub-brand, it’s likely to qualify.
Under SEIS, HMRC makes an exception if your company hasn’t started trading or issued any shares beyond those issued at incorporation. This period is known as the ‘on-the-shelf’ period.
So, if a corporate shareholder owns 51% of your company before you’ve started trading or preparing to trade, and before issuing any new shares - your company may still qualify, so long as that control is removed before you start trading or new shares are issued.
Even if SEIS isn’t available because of early control, you may still qualify for EIS, as long as the company is no longer under control before the EIS shares are issued.
When raising SEIS/EIS investment, your structure really matters. HMRC want to back genuine, independent, early-stage businesses through this scheme - not complex groups or investment vehicles.
Before you apply for Advance Assurance or take on investment, check your structure carefully, especially if you have other companies involved.
With InVestd Raise, you can get this right from day one, with guidance on eligibility, Advance Assurance, investment agreements, and issuing shares.
When looking to raise investment, choosing the right legal structure is vital when considering your long-term plan.
The Seed Enterprise Investment Scheme (SEIS) is a powerful tool for founders to incentivise investors. It does this by offering significant tax...
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