Kirsty Paton: ASA could save the day for company investors
Kirsty Paton, tax specialist from the entrepreneurial tax team at accountants Chiene + Tait, discusses how Advanced Subscription Agreements (ASA) could save the day for company investors amid the coronavirus uncertainty.
The tax relief offered through the UK Government’s Enterprise Investment Scheme (EIS) has been a major incentive in helping companies raise money and grow their business. With so much of the UK and global economy now in temporary lock-down, and with many businesses facing cash flow challenges, it could take on an even greater significance.
The scheme provides tax relief to individual investors who buy new shares in a business, enabling a company to raise up to £10m in a year and a maximum of £20m over its lifetime.
There are a number of rules that investors must adhere to in order to secure and maintain EIS tax relief on their shares or they run the risk of losing the benefit. These conditions can make life difficult for companies that find themselves requiring quick access to finance. A funding round from new or existing investors can be a lengthy process, requiring due diligence, valuation agreement and long-form legal documents. Businesses looking to quickly plug a gap while ensuring it does not adversely affect EIS tax relief for their investors have found there are few options available.
While a convertible loan note is a potential short term option, this can potentially cause problems under the ‘receipt of value’ rules or the ‘independent investor’ requirement. It can often remain on the company’s balance sheet until it stops looking for EIS-supported investors with prior investments being held for three years, making it a potentially a long wait.
Advance Subscription Agreements (ASA) could, however, offer a solution to the problem. A valuation doesn’t need to be immediately agreed, the legal process is quite straightforward and the company doesn’t need to worry about finding the funds to repay a loan or interest. Best of all, if implemented correctly, investors can get EIS relief on the investment. This is a win-win situation whereby companies secure important funds, which can benefit the wider economy, and investors get the tax relief which can be the decisive factor in whether such an investment is ultimately viable.
Advance assurance is strongly recommended by HMRC to companies looking for EIS investment and it is mandatory where an ASA is being sought. However, with no previous official parameters or guidance available, there has always been a large element of the unknown. This is no longer an issue as HMRC released guidance at the end of last year setting out key points to consider when using or drafting an ASA for EIS investors.
These include the need for simplicity in applications which will help determine qualifying status and the requirement of a longstop date occurring within six months by which shares must be issued if no funding round occurs. HMRC’s guidance also sets out that an ASA cannot permit refunds under any circumstances as well as no variation, cancellation or assignment of the agreement. Unlike a convertible loan note, no interest is payable on the amount invested under an ASA.
The EIS compliance forms are completed once the shares have been issued. It must, therefore, be shown that all the EIS requirements are met at the date of that issue.
The HMRC guidance is available on is website. It’s helpful but by no means gives companies, advisors or investors a guarantee that an investment under an ASA will qualify for relief. Advance assurance is always important when seeking any investment under EIS and, when using an ASA, it is essential.
In addition to other recently announced Government measures aimed at helping companies withstand the impact of Coronavirus, ASA could provide vital support to many UK businesses in the weeks and months ahead.
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