Policy 9: Reform advance assurance for EIS and SEIS to unlock more investment in high-growth startups
In collaboration with The Coalition for a Digital Economy (Coadec), we have produced a manifesto to make Britain the best place in the world to start and grow a business. It features 21 policies across three key policy areas: access to talent, access to investment, and regulation. We’re sharing the policies on our blog. To read the full manifesto, click here.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are targeted tax reliefs designed to promote investment into innovative startups and scale-ups. They offer substantial tax relief and de-risk investments in early stage businesses who often face considerable difficulty in raising funds. In the 2017/2018 tax year, 3,920 startups raised £1.9bn in investment under EIS, alongside 2,320 startups raising £182m under SEIS. Most business angels (58%) say they would not have invested at all, if the reliefs were not available.
In recognition of their vital role in the UK’s entrepreneurial ecosystem, the next government should commit to maintaining and improving the schemes. In particular, the government should seek to streamline the application process for advance assurance from HMRC, which investors typically insist upon before agreeing to invest. Although the government set a target of 15 working days to approve each application, the waits can often last more than three times longer. Startups often need to access capital quickly and 6 to 8 week waits can place otherwise viable businesses under significant pressure.
There are a number of measures the government could take to substantially shorten wait-times. For instance, they could work with investor organisations to develop standardised EIS/SEIS pre-approved Shareholders’ Agreements and Articles of Association to reduce the amount of time inspectors must spend on each application. Companies using standardised documents could qualify for a fast-tracked decision. They could also create greater certainty, with regards to wait times, by allowing applicants to track their application status online.
The advance assurance process is necessary under the status quo as there is no mechanism to make corrections post-investment if they fall foul of HMRC’s interpretation. If there were provisions to make such corrections, it could be possible for lower-risk applications (for instance, those using pre-approved standard documents, within the 7 year limit, and not in certain sectors) to be outsourced to accredited independent advisers.
HMRC should also remove the requirement that investors should be identified in applications for advanced assurance, in order to prevent ‘speculative applications’. While this restriction was a well-intentioned measure designed to reduce the backlog for the advance assurance process, it has created an unwelcome ‘chicken and egg’ situation, where startups need advance assurance to attract investors, but can’t get advance assurance without an investor.