How does a company qualify?

For its investors to be able to claim and keep the Seed Enterprise Investment Scheme (SEIS) tax reliefs relating to their shares, the company which issues the shares has to meet a number of requirements. Some of these apply only at the time the relevant shares are issued. Others must be met continuously, either for the whole of the period from date of incorporation to the third anniversary of the date of issue of the shares, or in some cases, from date of issue of the shares to the third anniversary of their issue. If the company ceases to meet one or more of those conditions, investors may have their tax relief withdrawn.

Finally, there are requirements as to how the company must use the monies it has raised via the issue of relevant shares.

Find out more in HMRC’s Venture Capital Schemes manual

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Requirements to be met at the time of issue of the shares

  • the company must be unquoted at the time of issue of the shares. That means its shares cannot be listed on the London Stock Exchange or any other recognised stock exchange. It may become quoted later without the investors losing tax relief, but not if there were arrangements for it to become quoted in existence when the shares were issued. For the Seed Enterprise Investment Scheme (SEIS) rules the Alternative Investment Market (AIM) and the PLUS Markets (with the exception of PLUS-listed) are not considered to be recognised exchanges, so a company listed on those markets can raise money under the SEIS if it satisfies all the other conditions. The PLUS-listed market is regarded as a recognised stock exchange and shares listed on that market at the time of issue will not qualify for SEIS
  • it must have fewer than 25 employees. If the company is the parent company of a group, that figure applies to the whole group
  • it must have no more than £200,000 in gross assets. If the company is the parent company of a group, that figure applies to total of the gross assets of the company and its subsidiaries. Shares in, and loans to, subsidiaries, are ignored for this purpose
  • the company must not have had any investment from a Venture Capital Trust (VCT), or issued any shares in respect of which it has submitted an EIS compliance statement
  • the company is restricted as to the amount of money it may raise under SEIS. It may not receive more than £150,000 in total under the scheme. That figure of £150,000 must also take account of any other State Aid received by the company in the three years preceding the relevant share issue which is de minimis aid according to EU regulations. (HMRC would not expect this to be common and if the company has had any such de minimis State Aid it will have been advised accordingly by the body responsible for administering that aid). If the relevant issue of shares takes the total over £150,000, then the excess will not qualify for relief
  • any trade being carried on by the company at the date of issue of the relevant shares, must be less than 2 years old at that date. That condition applies whether the trade was first begun by the company, or whether it was first begun by another person who then transferred it to the company. (Please note: the company need not have started trading when it issues the shares)
  • the company must not have carried on any other trade before it started to carry on the new trade

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Requirements to be met continuously from date of incorporation

  • the company must not be controlled by another company or another company and any person connected with it; and there must be no arrangements in place for it to be controlled by another company. However, if for genuine commercial reasons a company needs to put a new holding company above itself, it may do so without investors losing tax relief subject to certain conditions. The conditions are the same as those which apply for EIS
  • with effect for shares issued on or after 6 April 2013, any on-the-shelf period will be ignored when determining whether a company is or has been under the control of any other company. 'On-the-shelf period' means a period during which the company has not issued any shares other than subscriber shares and has not yet begun or prepared to begin trading

Find out more in the Venture Capital Scheme manual

  • it must not be a member of a partnership
  • the company may have subsidiaries, but if it does they must all be subsidiaries in which the company has more than 50 per cent of the ordinary share capital and which are not controlled (by other means) by any other company
  • the company may not control another company which isn't a qualifying subsidiary, and there must be no arrangements in place which would allow that to happen

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Requirements to be met continuously from date of issue of shares

The company must be UK resident, or have a permanent establishment in the UK.

If a single company, it must exist wholly for the purpose of carrying on a qualifying trade. If it is the parent company of a group, the group's business is looked at as though it were one business which must, in the main, meet the requirements of the scheme.

There is no requirement that the company or group must begin a qualifying trade within any specified period of time. However the company issuing the shares should be clear about what the intended qualifying trade is, and that should be apparent from the use to which the monies raised by the relevant share issue are put.

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How the money raised by the relevant share issue must be used

Within 3 years of the date of the relevant share issue, all the monies raised by that issue must be spent for the purposes of a qualifying business activity, carried on either by the issuing company or by a 90% subsidiary. If this condition is not met, investors will lose their tax relief. The condition will be considered to be met if an insignificant amount is used for a non-qualifying purpose, or remains unspent.

Monies raised by a share issue are not regarded as being spent for a qualifying business activity if they are used to buy shares or stock in a company. This does not prevent the issuing company from investing the monies in a subsidiary, providing that the monies are thereafter used by a 90% subsidiary for the purposes of a qualifying business activity.

The payment of dividends to shareholders is not regarded as being for the purposes of a qualifying business activity.

A qualifying business activity is either:

  • carrying on a new qualifying trade (see Requirements to be met at the time of issue of the shares for what is meant by a 'new' trade)
  • the activity of preparing to carry on a new qualifying trade which the company intends to, and begins to carry on
  • carrying on research and development which will lead to or benefit a new qualifying trade

Find out more in HMRC's Venture Capital Schemes manual

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Which trades qualify?

A qualifying trade is one which is conducted on a commercial basis with a view to the realisation of profit.

Most trades qualify, but some do not. A trade does not qualify if it consists wholly, or substantially, of 'excluded activities'. HMRC won’t regard activities as 'substantial' unless they are more than 20% of the whole.

The following activities are excluded:

  • dealing in land, in commodities or futures in 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 any other financial activities
  • leasing or letting assets on hire, except in the case of certain ship-chartering activities
  • receiving royalties or licence fees (though if these arise from the exploitation of an intangible asset which the company itself has created, that is not an excluded activity)
  • providing legal or accountancy services
  • property development
  • farming or market gardening
  • holding, managing or occupying woodlands, any other forestry activities or timber production
  • shipbuilding
  • coal production
  • steel production
  • operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment
  • operating or managing nursing homes or residential care homes, or managing property used as a nursing home or residential care home
  • 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
  • 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

Find out more in HMRC's Venture Capital Schemes manual

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