Ella Romanos & Adam Betteridge • January 1, 2019
In the last year the government passed new legislation that changes how companies can claim for SEIS and EIS tax relief, but many developers are as yet unaware of the changes, or of what they mean for them.
Some game developers have already been denied ‘advanced assurance’ for the tax relief, affecting their ability to raise money, and others who had received ‘advanced assurance’ prior to 15th March 2018 may still be unaware that their assurance could now no longer be valid for shares issued after this date.
This article is intended to help developers understand the core changes and provide advice for anyone looking to apply for SEIS/EIS tax relief, or who applied for advanced assurance prior to March 2018.
What is SEIS/EIS tax relief?
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) allow investors to claim tax relief on their investments into qualifying companies.
Companies can apply for ‘advanced assurance’, subject to which HMRC provides a certificate confirming that as long as the company does what it says it is going to do in its business plan, the company’s investors should be eligible for the tax relief. Many investors require this certificate before investing.
So what do you need to know?
The most important change: No more project-based ‘SPV’ companies
For the last few years, many companies (not just in games but in many industries including film), have been setting up companies for a single project, often called a ‘single purpose vehicle’ or ‘SPV’, and claiming SEIS/EIS tax relief on the investment into that company.
This is now no longer allowable in most cases.
HMRC now requires a 5-year business plan, showing that the company has growth plans and prove that they do not intend to just exist for a single project. They also expect to see that the company has a strategy if their first project fails, and that the money invested is actually at risk (e.g. you won’t just pay your investors back from your VGTR claim, effectively meaning the investor’s money may not actually be at risk because they will get it back whether your company fails or not).
It should also be noted that whilst the advanced assurance will be approved against your business plan, the advanced assurance certificate is not a guarantee that tax relief will be granted. Actual tax relief is not granted until your investor applies for it. Therefore, HMRC will be able to check that you are implementing your plan at that point or later.
What about Games as a Service?
It is plausible that single project arrangements may be allowable if the project is a Game as a Service, where you can show that you have a long-term business plan for that game, which meets their ‘growth and development rule’ i.e. shows that you are looking to scale your business, reinvest revenues, bring on more employees etc.
You only get one shot at advanced assurance
If you submit for advanced assurance and you get rejected, there is no formal appeal process.
Therefore, if you aren’t aware of these changes and apply based on the old rules, you could get rejected and not get another chance.
Yes, your investors can still take the risk by investing without advanced assurance and then apply for the tax relief at the appropriate time, assuming you run your company in accordance with a suitably amended business plan. However, it is likely many investors will not want to take that risk.
You can’t apply for advanced assurance speculatively
Whereas HMRC used to allow you to apply for advanced assurance before you had any investors interested, they do not allow this anymore. As part of your application, they expect you to demonstrate that you have interest from some potential investors.
What about if I have advanced assurance from before 15th March 2018?
You should speak to your tax advisor or HRMC, as the assurance may no longer be valid. You may need to get a new certificate that is based on the current requirements.
If you already have SEIS shareholders in the business who invested based on an advanced assurance certificate issued prior to 15th March 2018, you should still speak to your tax advisor or HMRC to get advice on whether your existing certificate is still valid for shares issued after this date.
New investors will likely want to see an advanced assurance certificate that is post March 2018.
So what should I do?
As always, you should seek advice from a suitably qualified tax advisor or HMRC themselves. We are not qualified tax advisors and not therefore qualified to offer any kind of tax advice. This article is simply highlighting some of the key changes we have heard about and make developers aware of them so that they can seek professional advice.
In short, when applying for advanced assurance, make sure that you at the very least read the new legislation and guidance as provided by HMRC, and apply accordingly.
About Authentic Media & Fundamentally Games
Authentic Media (https://www.authentic-media.co.uk) and Fundamentally Games (www.fundamentallygames.com) work together to provide support to developers and investors including access to finance, due diligence, structuring and oversight.
Ella Romanos & Adam Betteridge • January 1, 2019