HMRC issues guidance on Advance Subscription Agreements and EIS relief
Published on 23rd Jan 2020
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) can provide valuable tax reliefs for individuals wishing to invest shares in small, higher- risk trading companies. There are, however, numerous qualifying conditions which must be met in order for the reliefs to apply.
One of these sets of conditions is that the shares must be subscribed for cash, must be fully paid up and cannot be issued in consideration of any debt owed by the company. As such, EIS relief is not granted on shares issued upon the exercise of convertible debt. This has sometimes caused problems for investors wishing to benefit from EIS or SEIS relief where funds are provided as part of a "bridging round" in which the investment is intended to be converted into shares at a valuation to be determined in the future (usually as part of the company's next large equity round).
A solution to the issue has been for investors to enter into Advance Subscription Agreements (ASAs) with a company to pay subscription funds into the company, with the shares to be issued at a later date and at a valuation to be determined at the time that the shares are actually issued.
Historically, HMRC gave advance assurance for ASAs as qualifying for EIS and SEIS relief, but did not have any specific guidance around the terms of such instruments.
In particular, HMRC highlights specific features that an ASA will need to have so that it is suitable for EIS or SEIS relief, confirming that it will only consider an ASA suitable for EIS or SEIS if the agreement:
- prohibits the subscription payment from being refunded under any circumstances;
- cannot be varied, cancelled, or assigned;
- bears no interest charge;
- does not offer investor protections; and
- has a "longstop date" (expected to be no more than six months from the date of the agreement).
Although the HMRC guidance is helpful and clarifies the features of an ASA that might prejudice EIS or SEIS relief, parties will need to be careful to avoid falling foul of the new terms.
In particular, the longstop date of no more than six months could present problems where, for example, the next large equity financing which would trigger the allotment of shares under the ASA is expected to occur further in the future (for example, 12 months).
The parties will need to be careful not to include any express provisions permitting the terms of the ASA to be varied nor any terms which could be construed as "investor protections" (for example, consent rights over certain actions of the company).
The guidance also states that any advance assurance application for the shares to be issued must be made before the ASA is entered into.
We can help advise investors and companies in relation to EIS and SEIS investments. Please speak to any of the contacts below for further information on this guidance or on tax-efficient investments in companies more generally.