Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
The Enterprise Investment Scheme (EIS) brings many attractive benefits to early-stage investors, such as compelling tax reliefs which help to boost investors’ real returns. Yet EIS is also quite intricate and involves some complex rules which can be difficult to navigate confidently – such as “advance assurance”.
Below, our team at Bure Valley Group explains how advance assurance works, why it matters for early-stage investors and how it can be integrated into a wider investment strategy. We hope these insights are useful to you.
To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page here. For enquiries regarding our latest projects and funding, you can reach us via:
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What is advance assurance?
In short, advance assurance is a type of preliminary confirmation from HMRC that a company meets the eligibility criteria for EIS. To understand how this works and the implications for founders and investors, it is first important to recap how EIS operates.
EIS offers tax reliefs to investors such as income tax relief up to 30%. For instance, if an investor commits £100,000 to an EIS-qualifying company, then £30,000 could be claimed back via his/her next Self Assessment tax return under the income tax section.
Other benefits from EIS include capital gains tax (CGT) relief on the disposal of qualifying shares, inheritance tax (IHT) relief on qualifying shares and loss relief equivalent to the investor’s highest Marginal Rate (e.g. if the company fails).
Investors are likely to be enticed by these EIS tax incentives, making them keen to determine whether prospective startups (for their portfolios) are eligible for the scheme. However, the process of EIS application is not always straightforward and can take some time to complete.
This is where advance assurance can help. By gaining a tentative “yes” of approval from HMRC, before the application is finalised, investors and founders can gain greater clarity about the company’s future EIS status.
Why advance assurance matters
Knowing whether or not a company qualifies for EIS is very important for its founders. Without EIS status, a startup will have fewer doors to push open for funding opportunities. Gaining advance assurance, however, gives the company a huge stamp of legitimacy and prestige in the eyes of prospective investors.
For investors, advance assurance is a positive signal (albeit not a guarantee) that a startup has strong fundamentals and a good business plan. To apply for advance assurance, founders need to submit detailed information such as company financials, intended use of funds and the nature of the proposed share issue. HMRC then consider the application in light of various factors like risk-to-capital condition and adherence to EIS rules.
Therefore, advance assurance lowers the perceived risks of a prospective startup to investors and makes it more attractive due to the tax-efficient potential returns on offer. Investors can then plan their early-stage investments to minimise CGT, IHT and income tax.
Implications for wider portfolio planning
If HMRC grants advance assurance to a startup’s application, it is normally bound to that assurance (although there is no statute requiring it to be). This is assuming that all information supplied by the founder(s) is accurate and complete.
As such, there are still risks for investors to consider when surveying different early-stage opportunities with advance assurance. It is also worth remembering that, for a company to continue its EIS status (granting the associated tax reliefs to investors), it must keep within the requirement of the scheme – e.g. keeping the maximum number of staff under 250.
For greater confidence that an EIS application will ultimately be successful, investors may wish to consider using a professional investor network (such as ours at Bure Valley Group). Here, an experienced team can assist founders with the application process and maximise its chances of getting accepted – giving more confidence to investors.
There will always be some risk with EIS investments, nonetheless. This is why diversification is very important when structuring your portfolio and tax affairs. Be careful about resting your IHT plan upon a single EIS-qualifying company, for instance. If it later loses its EIS status (e.g. due to poorly filed paperwork), this could expose your estate to a higher tax bill.
To minimise the risks, do not be afraid to ask pointed questions to founders about their EIS status and application. For instance, did they seek professional advice when filling and submitting form EIS1 or SEIS1? Do they have a clear document outlining the company’s features in light of the EIS eligibility requirements (e.g. period from first commercial sale to investment <7 years)?
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group?
Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827