VCM33025 - SEIS: income tax relief: general requirements: advance subscription agreements

Advance Subscription Agreements

Advance subscription agreements (ASAs) are sometimes used to raise funds for a company quickly, at a time when the value of shares cannot be easily ascertained. An ASA enables investors to pay subscription funds into a company at an early stage, with the shares to be issued at a later date. It is therefore expected that the terms of such an ASA will not be complex.

The more complex the agreements, or the longer the period between the advance purchase and the issue of shares, the higher the risk that the rules to qualify for SEIS relief will not be met. The ASA must not function as an investment instrument that offers other benefits, such as investor protection. The ASA must be simply that, an agreement to subscribe new funds in advance of the issue of the shares for the purpose of the growth and development of the company’s trade. The subscription payment must not be in effect a loan and ASA’s used, as a whole or in part, as a means of converting a debt or some other obligation into shares will not be considered eligible.

The company will need to demonstrate how the timing and terms of the agreement fits into its business plan and planned expenditure on growth and development.

HMRC will not consider ASAs suitable for the SEIS unless the agreement:

  • does not permit the subscription payment to be refunded under any circumstances,
  • cannot be varied, cancelled, or assigned,
  • bears no interest charge, and
  • has a longstop date by when the shares purchased must be issued.

Procedural matters

If the company wishes to apply for advance assurance it should do so before the ASA is entered into. The advance assurance service is a discretionary, non-statutory service. Advance assurances are not mandatory in order to obtain SEIS relief.

Where an application for assurance is made that involves an ASA, HMRC will consider the terms of the agreement when providing an opinion as to whether the proposed investment and issue of shares would qualify.

As a general rule, due to the risks noted above, HMRC expects a longstop date to be no more than 6 months from the date the ASA is entered into. Where the longstop date provides for a period any longer than 6 months HMRC is unlikely to be able to provide an advance assurance in view of the likelihood that any future conditions anticipated at the date of the ASA will not accurately reflect the true conditions at the time of the eventual share issue.

Where an assurance has been given and an ASA subsequently entered into, HMRC will not provide any further assurance on proposed changes to such an agreement, these would instead be considered if and when a compliance statement is submitted in respect of the share issue.

SEIS relief will only be available from the date of the share issue. A compliance statement (SEIS1) should not be submitted before this date.