Tax relief for investors under both the SEIS and EIS hangs on the trade qualifying under the legislation. Sometimes we can find a ideas to bring the trade within the legislation. Answering questions relating to trading status is a specialist area for us.
Our services relating to qualifying trades for SEIS/EIS include:
- What is a qualifying trade;
- Excluded activities; and
- HMRC advance assurance.
What is a qualifying trade for SEIS & EIS
The legislation relating to what is or what is not a qualifying trade is the same for both SEIS and EIS tax relief. The money raised by an SEIS/EIS share issue must be used for a qualifying trade.
Generally, most trading companies will be regarded as carrying on a qualifying activity for SEIS purposes if:
- The trade is conducted with a view to a profit; and
- Does not to any substantial extent include any “excluded” activities.
Excluded activities for SEIS and EIS
The types of activities which will not qualify for SEIS or EIS include:
- Dealing in land, commodities or futures, if those futures are shares, securities or other financial instruments;
- Dealing in goods: other than in an ordinary trade of retail or wholesale distribution;
- Financial activities: e.g. banking, insurance, money-lending, debt-factoring, hire-purchase financing or any other financial activities;
- Leasing or letting assets on hire, except certain ship-chartering activities;
- Licencing: receiving royalties or licence fees. However, if your company has created an intangible asset, e.g. software, which you licence to others, this is not an excluded activity;
- Providing legal or accountancy services;
- Property development;
- Farming or market gardening;
- Forestry: holding, managing or occupying woodlands, any other forestry activities or timber production;
- Coal production;
- Steel production;
- Hotels: operating or managing hotels, or comparable establishments, or managing property used as a hotel or comparable establishment;
- Nursing homes: operating or managing nursing homes, or residential care homes, or managing property used as a nursing home or residential care home;
- Electricity generation: generating or exporting electricity which will attract a Feed-in Tariff, unless generated by hydro power or anaerobic digestion, or unless carried on by a community interest company, a co-operative society, a community benefit society or a Northern Irish industrial and provident society
- Services to excluded activity: providing services to another person where that person’s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services
Excluded activities are subject to caveats which may mean that the trade can qualify for SEIS/EIS.
A company can carry on some excluded activities, but these must not be a ‘substantial’ part of the company’s trade. HMRC defines ‘substantial’ as more than 20% of the company’s activities.
Providing services ancillary to excluded activities may be okay. So, for example providing advisory services in the financial sector is acceptable, even though financial activities themselves are excluded. The HMRC have gone on record as stating: “The provision of services, such as advice on financial matters, is not covered by the exclusion”.
However, the trade of supplying an individual to perform an excluded activity may not be a qualifying trade. Cases show the trade of supplying an accountant was within the “supply of accountancy services”. Therefore accountantcy is not a qualifying trade.
Purchasing commodities as raw materials
Dealing in commodities is excluded. However, if you purchase a commodity as a raw material for your manufacturing operation, you are not disqualified even though you:
- Buy commodities in the commodity markets;
- Trade in the future markets to fix your raw material prices.
Royalty or licence fees
Receiving royalty or licence fees is excluded. However, this is waived where the royalties or licence fees are attributable to the exploitation of ‘relevant intangible assets’.
“Intangible assets” has the meaning under normal UK accounting practice. An asset is a relevant intangible asset if it has essentially been created by the company which has issued the shares. Hence software development is a qualifying trade for SEIS and EIS.
HMRC for advance assurance
If you consider your trade is borderline, apply to HMRC for advance assurance that your entire SEIS proposal complies on form SEIS AA. HMRC is normally bound by an assurance if the form provides:
- Complete and accurate information;
- All the information to allow HMRC to determine whether all the requirements are likely to be met.
HMRC will want to review your Articles of Association and any shareholders’ agreement or investment agreements. We draft or review these documents to make sure they comply.