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conditions, investors may have their tax relief withdrawn.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
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 two 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.
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
new holding company above itself, it may do so without investors
losing tax relief subject to certain conditions. The conditions are
as those which apply for EIS.
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
- 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.
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.
How the money raised by the relevant share issue must be used
Within three 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 per cent
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 per cent subsidiary for the purposes of a qualifying business
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
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 per cent
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
- 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
- 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
- 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