One of the first things you’ll be asked when applying for SEIS/EIS advance assurance is whether your company meets the basic age limit. At the time of applying, your company must have been trading for less than:
- 3 years for SEIS
- 7 years for EIS
- 10 years for knowledge-intensive companies (or less than 10 years since annual turnover exceeded £200,000)
However, two conditions provide an exception to this rule.
Condition A: follow-on funding
Condition B: investment to enter a new product market or geographic market
What is Condition A, follow-on funding?
If your company received SEIS/EIS investment (or will receive investment) before the end of the basic age limit listed above, you may be able to leave the door open for future funding after the permitted basic age limit if:
- the funding is used for the same (“relevant”) qualifying business activities as for the first relevant investment
- the need for the follow-on funding was foreseen in the company’s business plan at the time the initial investment was planned.
When submitting your first SEIS/EIS application, you should state why you will require follow-on funding, so the need for it is preempted and any future applications will be consistent with the first one.
The funds must be spent on the same business activities, and not to start a new activity or project.
For example, a company receives investment to start a feasibility study for a new drug and states more investment will be needed for a clinical trial if the feasibility study is successful. The study is successful and the company goes on to receive more EIS funding for the clinical trial.
Likewise, if a company uses the investment to develop new software, it may receive follow-on funding to continue to update and release new features on the software.
You don’t need to specify the exact amount or date you’ll need follow-on funding, just an overview of how it relates to the initial investment and the rationale for it. However, if your plans, timeline or investment amount do change from the initial application, you should explain why.
It’s worth noting that follow-on funding doesn’t need to be made under the same scheme as the initial investment. For example, the first investment can be made under SEIS with the follow-on funding made under EIS.
For more details, read HMRC’s guidance on follow-on funding. You can also see some helpful examples of successful and unsuccessful follow-on funding applications.
HMRC end with an important disclaimer:
A company cannot use a relevant investment within the basic age limit to ‘bookmark’ future, unspecified and unrelated, potential investments.
In other words, don't say you will need follow-on funding if you don't.
What is Condition B, investment to enter a new market?
While Condition A is for companies that have received S/EIS investment in the past, Condition B is there for those that have never received S/EIS investment and are now outside the basic age limit, or as the name suggests, branching out into a new market.
Under most circumstances, a company that’s been trading for over 7 years will have an established customer base and track record investors can go off.
For this reason, the company is seen as lower risk, outside the basic age limit, and therefore ineligible for EIS. Investors shouldn’t receive such generous tax breaks for investing in proven companies. The cutoff has to be somewhere.
However, an ‘established’ company may wish to enter a new product or geographic market that’s so far from its current market investors cannot count on its previous track record. This would once again make the company a higher risk investment.
Condition B is intended to help companies through a high growth phase and not incremental growth, so one of the key caveats is the 50% turnover test:
- The amount of the relevant investment, together with any other relevant investments made within a 30-day period, must be at least 50% of the company’s average annual turnover, averaged over the previous five years.
So if your company's average turnover for the previous five years is £2 million, you will need to raise at least £1 million under EIS to satisfy the 50% turnover test. Also, all of the funds must be used on the investment into the new product or geographic market, and not for other business activities.
When writing your business plan for the application, here are some of the key questions you should look to answer:
- How is the new product market or geographic market different from the current one?
- Who are the customers in the new market?
- What is the competition in the new market?
- How will the money be spent to enter the new market?
- What is the business case for entering the new market?
HMRC will judge each application on a case-by-case basis, so it’s worth reading their full guidance on Condition B before applying. It also has some examples of successful applications.
It’s worth noting that the EIS investment must be made before the company has entered the new product or geographic market.
That’s not to say you can’t perform market research or a test run, but HMRC’s rule of thumb is the more time and money spent in the ‘new market’ the less likely it is to be classed as a ‘new market.’
If you want to apply for EIS through Vestd and your company is outside of the basic age limit, start the application by saying your company has been trading for less than 7 years, then provide details of the follow-on funding/new market in the application itself.
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