SEIS & EIS Qualifying Trades

What is a qualifying trade for SEIS & EIS

The legislation governing qualifying trades is the same for both SEIS and EIS tax relief.  The money raised through an SEIS/EIS share issue must be used for a qualifying trade.  Although the legislation sets out specific excluded activities, applying these rules to modern business models and emerging technologies can be challenging. A business that appears to fall within an excluded category may still qualify, depending on the nature of its activities and the relevant statutory exceptions.

Generally, a trading company will be regarded as carrying on a qualifying trade if:

• The trade is conducted on a commercial basis with a view to making a profit; and
• It does not consist wholly or to a substantial extent of excluded activities.

Excluded activities for SEIS and EIS

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Excluded activities for SEIS and EIS

The types of activities that may prevent a trade from qualifying for SEIS or EIS include:

• Dealing in land, commodities or futures, where the futures relate to shares, securities or other financial instruments;
• Dealing in goods, other than in an ordinary trade of retail or wholesale distribution;
• Financial activities, such as banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
• Leasing or letting assets on hire, except certain ship-chartering activities;
• Receiving royalties or licence fees, subject to exceptions for certain relevant intangible assets created by the company;
• Providing legal or accountancy services;
• Property development;
• Farming or market gardening;
• Forestry, including holding, managing or occupying woodlands, other forestry activities or timber production;
• Shipbuilding;
• Coal production;
• Steel production;
• Operating or managing hotels or comparable establishments, or managing property used for these purposes;
• Operating or managing nursing homes or residential care homes, or managing property used for these purposes;
• Certain electricity generation activities, including some generation eligible for Feed-in Tariffs, subject to statutory exceptions; and
• Providing services to another person whose trade consists substantially of excluded activities, where the relevant control conditions are met.

The detailed statutory definitions and exceptions must be considered in each case.

Substantial activity

A company can carry on some excluded activities, but these must not represent a substantial part of its trade. HMRC generally treats activities accounting for less than 20% of the whole as not substantial where a percentage test is reasonable. However, the assessment is fact-specific and may also consider factors such as management time and the importance of the activity to the business.

Ancillary services

Providing services ancillary to excluded activities may be acceptable. For example, advisory services relating to financial matters are not automatically excluded simply because financial activities themselves are excluded.

However, supplying an individual to perform an excluded activity may itself fall within the exclusion. The nature of the service actually provided, rather than its label, is important when assessing eligibility.

Purchasing commodities as raw materials

Dealing in commodities is an excluded activity. However, purchasing commodities as raw materials for a manufacturing trade does not necessarily amount to dealing in commodities as an excluded activity, even where the company:

• Buys commodities on commodity markets; or
• Uses futures markets to manage or fix raw material prices.

Royalty or licence fees

Receiving royalties or licence fees is generally excluded. However, an exception may apply where the royalties or licence fees arise from exploiting relevant intangible assets created wholly or mainly by the company or a qualifying subsidiary. This may allow income from certain software and other intellectual property to qualify, depending on how the asset was developed and the applicable statutory conditions.

HMRC for advance assurance

If your business activities may fall close to an excluded category, you can apply to HMRC for advance assurance that a proposed investment is likely to qualify. Advance assurance is discretionary, is not a guarantee of tax relief and does not replace the need to satisfy the statutory requirements throughout the relevant period. There is no HMRC fee for the service.

HMRC will need sufficient information to assess the proposed investment, including:

• Complete and accurate information about the company and its activities;
• Details of the proposed share issue and how the investment will be used;
• The company’s articles of association and any relevant shareholders’ or investment agreements; and
• A business plan explaining the company’s activities, commercial model and growth plans.

We can help assess how the business’s activities fit within the legislation, identify potential eligibility issues and prepare an advance assurance application that clearly explains the company’s business model and supporting evidence.