Blind item: Which EIS scheme is fraudulently claiming Advance Assurance it hasn’t got?

A reader emailed me recently to allege that a certain “EIS” scheme was taking money from investors under the pretense of having Advance Assurance from HMRC, when in reality it had been told that it would not be EIS-eligible.

EIS is a tax relief scheme implemented by the Government to encourage wealthy and sophisticated investors to invest in high-risk early-stage companies. To be eligible for EIS relief, companies must not be too large (in terms of both money and number of employees), must use the money raised in a certain way, and the investment must genuinely be at risk.

Investors who invest in EIS-qualifying companies get money back on their income tax bill, can defer a capital gains tax bill, get Inheritance Tax relief, and if the EIS goes poof (as many inevitably will, such is their high risk nature), they can get tax relief on their losses as well.

None of these reliefs would be very attractive if investors couldn’t be certain whether they actually applied. They can’t exactly be expected to go to the premises and count up the number of employees. To solve this problem, companies can apply for “Advance Assurance”, whereby they supply full details of their investment to HMRC, who confirm whether or not it should qualify for EIS relief.

EIS schemes don’t usually feature on Bond Review because the letters “EIS” should be their own risk-warning. And I don’t publish anything that can’t be verified externally, so while whistleblowing is a noble and worthy cause, this isn’t the place to do it.

The claim that the EIS Scheme X (as we’ll call it) was claiming Advance Assurance which it didn’t have piqued my interest, however. Firstly, if it was true, investors deserved to know. And secondly, it should be easy to verify by checking with HMRC. Just as you would if you wanted to know whether something was a genuine ISA or pension scheme.

So I asked HMRC’s Enterprise Centre whether EIS Scheme X did in fact have Advance Assurance. They replied:

You would need to approach the company directly regarding whether or not they have been issued an Advance Assurance.  HMRC is bound by customer confidentiality and is not permitted to divulge information in relation to a customer’s  tax affairs without appropriate authority. 

HMRC appeared to be under the impression that I had asked how much income tax my neighbour Bob had paid, rather than whether a company was fraudulently raising money from the public while putting words in HMRC’s mouth. I replied:

How can I verify whether a company claiming they have been issued Advance Assurance has actually done so or whether they are doing so fraudulently?

I also pointed out that EIS Scheme X had claimed to be “HMRC approved” in a public-facing YouTube video. (This can only be read as claiming Advance Assurance, as HMRC does not give any other kind of approval to EIS schemes.) Therefore, even if receipt of Advance Assurance status, or lack of it, could be confidential information, it ceased to be so after EIS Scheme X claimed it in public.

You don’t get to run around raising money from investors while telling them “A is true” and then claim that nobody’s allowed to point out “A is false” because of your right to privacy.

This hit a brick wall with HMRC.

Until such time as HMRC is presented with the appropriate authority HMRC is not able to comment for the reasons previously explained to you.

Where a company applies for and receives advance assurance it will be in receipt of an assurance letter issued by HMRC.  This can then presented to potential investors. As the transaction is a matter between the company and (potential) investors, where there is any doubts by the investor(s) it is the issuing company’s responsibility to allay any concerns in order to secure investment, hence the common practice of drafting subscription agreement etc.

This continues to miss the point that if investor is being told fraudulently by a company that they have Advance Assurance, asking the same company for more information or drawing up an agreement is completely pointless.

A common mistake by novice investors is to think that “due diligence” means asking questions of the company and letting them market at you some more, rather than independently verifying that what they tell you is accurate.

I wasn’t expecting HMRC’s Enterprise Centre to make the same schoolkid error.

If my reader was, for whatever reason, trying to defame EIS Scheme X, and they do in fact have Advance Assurance, then it’s no harm no foul.

If, however, their allegation is true, HMRC are allowing a fraud to take place. HMRC know for a fact whether or not they issued Advance Assurance to EIS Scheme X. They also know that EIS Scheme X is claiming Advance Assurance in public-facing promotions (because I told them). While HMRC appears not to have a legal duty to take action (there is no legal duty to report a crime), they shouldn’t need one.

It would be easy to say “Tough luck, EIS is supposed to be high risk, and the risk of the EIS turning out to be a scam is merely a subset of the wider risk that the EIS fails and you lose all your money. So HMRC is correct to pass the buck back to the EIS.”

But this is different because if EIS Scheme X is not in fact an EIS, investors won’t just lose their money, but they’ll get a nasty shock when HMRC turns down their claims for tax relief – especially if it results in interest and penalties. It’ll be an even nastier shock when they learn that HMRC knew that EIS Scheme X was defrauding them but didn’t lift a finger to stop it.

It is reminscent of the role HMRC played in the pension liberation scandal, when its policy of allowing anyone to register a pension scheme if they sent in two tokens from a packet of breakfast cereal exacerbated the losses from fraudsters setting up scam pension schemes, into which investors were duped into transferring their money. In 2013, HMRC tightened up the process of scheme registration, recognising that its previous process had been too lax; without, we should note, requiring any new legislation to do so. Better late than never.

HMRC’s current view that it’s not HMRC’s problem if an “EIS” is claiming HMRC gave them approval is reminiscent of its – now abandoned – view that it’s not HMRC’s problem if people are fraudulently setting up pension schemes.

As long as HMRC continues to take the view that it’s not its problem whether Advance Assurance is claimed fraudulently, Advance Assurance is effectively worthless unless the EIS manager is one of the big guns who has been around for donkey’s years and stands to make more money from being honest than committing fraud. Which is fine and dandy if you’re an Octopus or a Foresight, but rather contrary to the spirit of EIS.

More on this story if and when EIS Scheme X unravels. Unless of course my reader was defaming an innocent EIS scheme for no readily apparent reason, in which case this will never be brought up again.

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5 thoughts on “Blind item: Which EIS scheme is fraudulently claiming Advance Assurance it hasn’t got?

  1. The easy way to deal with this is ask the company for a company of their letter from HMRC confirming their EIS advance assurance, this is an easy piece of DD to do. I’ve seen lots of these documents, so very happy to compare notes if you get a copy!

  2. I haven’t seen lots of them, so am open to being educated, but Google Images suggests they’re just bog-standard letters on HMRC letterhead. It would take five minutes to mock up something in Photoshop and as they’re not complex documents, you could even fool someone who’d seen lots of them.

    You have skipped over the fundamental point that anything that begins “ask the company” is not due diligence, it is pseudo-diligence. Asking the company for more marketing material is not due diligence, due diligence is independently verifying what they’ve told you. The only way to verify for certain that an Advance Assurance letter from HMRC is genuine is to go to the source, HMRC. Only they won’t tell you for pointless jobsworth non-reasons.

    Even if an experienced EIS specialist could spot a fake, it doesn’t matter much as it’s a fair bet that EIS X investors won’t be consulting one.

    You could say “sucks to be them, should have done more research”, but the issue here is not that some dodgy investment scheme is allegedly lying to them, that would be a dog-bites-man story. The issue is that HMRC can blow open the lie and has chosen not to.

  3. Fun fact: The EIS in question has just scrubbed the public-facing video referred to from YouTube – the one in which they claimed “HMRC approved”.

  4. Because I can’t verify the accusation one way or another due to HMRC’s Johnny Tightlips act.

    I don’t publish accusations I can’t verify, for legal reasons and as a point of principle.

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