The Five Big Questions
Once again we’re into the final weeks of the tax year and the EIS season is ramping up. What’s new this year?
The big issue at the moment is the length of time it is taking for sponsors and scheme arrangers to obtain Advance Assurance from HMRC that their EIS companies qualify. In recent years an Advance Assurance has become more and more a basic requirement, with the effect that the numbers of applications to HMRC have been steadily increasing. At HMRC, the resources have not been scaled up to cope with the demand; the result is a huge backlog and delays of many weeks. So much so that at least one major provider has announced it can no longer accept applications because it has run out of companies with Advance Assurance to invest in.
Then there’s probably a number of firms in a similar situation who have not yet made any announcement, who are still accepting applications for their Funds with a limited number of companies ready to receive investment.
1: Has the company/companies received an Advance Assurance?
2: Has the fund manager identified investible projects ready and waiting to go?
3: How quickly will the manager be able to issue the EIS 3 tax certificates?
According to the rules, a company must have carried on a qualifying trade for no less than 4 months before it can apply for EIS 3s. So, provided the manager invests your money promptly you should be in receipt of your EIS 3 after about five months. However, if the investment is being made into a company which is already trading, the manager is able to apply to HMRC immediately and you should be in receipt of your EIS 3 within 4-6 weeks.
4: Is there a clear and plausible exit strategy?
Many exits from EIS companies depend on a trade sale, usually a sale of the shares of the company to a secondary buyer keen to pick the business up and run with the ball. But not all exits are like this. After the expiry of the 3 year EIS term an exit can sometimes be engineered promptly by simply selling off the remaining assets and winding the business up. We have at least two offers which fall into this category.
5: The most important of them all and should really have been at the top of the list: what is the track record of the managers?
How many times have the managers exited from previous EISs and what is the average return they have achieved? How committed are they to the business? Have they invested their own money into it?
In an ideal world, you should be looking for a clean sweep of the above questions. Good luck!
Martin Sherwood, Partner
Martin Sherwood has many years’ experience of small company fundraising and in particular the tax-efficient investment market, specialising in the Hospitality & Leisure Sectors. He is currently chairman of the four British Country Inns companies and of Halcyon Hotels and Resorts plc, which is in joint venture with Luxury Family Hotels, which he helped launch 20 years ago. He was founder and head of Tax Efficient Solutions, first at Teather & Greenwood (1997-2004) and subsequently at Smith & Williamson (2004-2010), which he left to found Enterprise.
Martin has been closely involved in both Venture Capital Trusts and Enterprise Investment Schemes (EIS) since their inception, and is a founder director of the EIS Association, the official trade association of the EIS industry.
Martin works very closely with a wide range of Hospitality & Leisure entrepreneurs and has a significant network of investors and professional contacts as well as being a serial investor in his own right.