Investment in an SEIS or EIS project has two completely different risk components:
1/ Income Tax / Loss Relief
2/ Project success or failure
When considering investing it is imperative to ascertain that the project has HMRC Advanced Assurance and will continue to qualify for relief throughout the life of your investment. Without this component you are simply back at the racetrack.
Risk Considerations – Is the EIS/SEIS Tax Relief at Risk?
When looking at Investments into EIS or SEIS, you should look at the nature of the company as well as the company itself, i.e. What is the business doing, and how is it doing it?
Recent HMRC clamp-downs and court cases have demonstrated that previously acceptable EIS operations are now, no longer allowed by HMRC. This area should be of particular concern to Investors, as Investments described as “Low-Risk”, “Guaranteed returns” or even “Tax free returns of X% per annum” need to be looked at very carefully indeed. If nothing else, an investor should factor in the risk of not just business success or failure, but also whether the initial tax relief will stand up to HMRC scrutiny in the future.
History has shown us that in the eyes of Government – ‘Everything is Guaranteed Until it Isn’t’. So whether you decide to invest in a “high-risk” or “low-risk” EIS or SEIS, try to remember, if it looks to good to be true, it probably is!
Project success or failure should be the only ‘risk’ component if the scheme is used correctly, and as mentioned before, some research, in-depth reading coupled with common sense Q&As, should give you enough information to make a reasonable decision, it is a Punt after all.
Some obvious questions for a start-up or development project should include, questions like:
How much does it cost to raise the funding?
Where do the fees go and for what?
What will the funding be spent on?
Is there a business plan?
What is the monthly salary bill?
What are the the operating costs?
Who are the competition?
What will differentiate this company from the competition?
For how long?
What is the projected time to market for revenue creation?
What is the projected time to market for ‘breakeven’?
What is the projected time to market for profitability?
What are the projected returns to investors?
What is in it for the Investor? How? Why?
As well as the above, the business plan should also show the timeline and deliverables and all of this should be considered by Investors to be the minimum requirements for you to spend your time investigating further.
Just like the Grand National, the excitement is palpable as you research the investment opportunities on offer deciding which project to pick. However, unlike the National you have a fixed stop-loss, which means that your maximum loss on a £1 EIS investment is 38.5p.