HMRC investment rules

In order to be able to claim, and keep, the tax reliefs relating to your shares, the Investee Company which issues the shares has to meet a number of rules regarding the kind of company it is, the amount of money it can raise, how and when that money must be used and the type of trading activities carried out.

The Investee Company must satisfy HMRC that it meets these requirements, and is therefore a qualifying company. The shares must then be held for at least the Relevant Period, or income tax relief will be withdrawn. Generally, this is three years from the date the shares were issued. However, if the qualifying trade started after the shares were issued, the period is three years from the date the trade actually started.

Which companies qualify for EIS/SEIS?

In summary, the Investee Company must:

Be an unquoted company, meaning it can’t be listed on any recognised stock exchange. It can subsequently become listed without investors losing income or capital gains tax reliefs, but only if there were no plans for it to become listed when the shares were issued. For the purpose of EIS and SEIS, the Alternative Investment Market (AIM), and PLUS markets (with the exception of PLUSlisted) are not considered to be recognised exchanges. N.b. in circumstances where a company subsequently lists, it would no longer qualify for business property relief and the IHT exemption would fall away

  • Not be controlled by another company. Nor must there be any arrangements in existence for it to be controlled by another company for three years from the issue of the shares
  • Not have any subsidiaries that are not also qualifying companies
  • Be categorised as a small company, as per the Gross Assets Test. The Gross Assets of the company – or of the whole group if it’s the parent of a group – can’t exceed £15 million immediately before any share issue and £16 million immediately after that issue (no more than £200,000 in Gross Assets for SEIS prior to investment)
  • Have fewer than 250 full-time employees (or their equivalents) at the time the shares are issued (or 500 for knowledge – intensive companies and fewer than 25 employees for SEIS)
  • Be either a company carrying on the qualifying trade, or the parent company of a trading group. The trade can be carried on either by the company issuing the shares or a subsidiary, but if it’s carried on by a subsidiary, it must be at least a 90% subsidiary. Please note that the rule is worded so as to prevent any party other than the company issuing the shares, or its 90% subsidiary from carrying on the trade. That means that if the trade is being carried on in partnership, then the company will not qualify 22 The Alternative Investment Platform – Platform Guide
  • Raise no more than £5 million (£150,000 for SEIS) each year and no more in total than £12 million (£20 million if it is a knowledge intensive company) from a combination of EIS, VCT, SEIS or other State Aid investment sources
  • Use the capital raised to trade, prepare to trade or carry out research and development in order to trade. Acquiring an interest in a company, a trade, or intangible assets or goodwill employed for the purposes of a trade will not be sufficient.
  • Have a permanent establishment (although not necessarily be resident) in the UK
  • Issue the shares within seven years of first commercial sale (ten years for knowledge-intensive companies)
  • Issue the shares to raise money for the purposes of a qualifying business activity so as to promote business growth and development

The rules regarding not being controlled by another company, qualifying subsidiaries and the company carrying on the trade must be met throughout the Relevant Period. If they’re not then you’ll lose your tax reliefs

Excluded trading activities

An EIS/SEIS Qualifying Company’s trade must be conducted on a commercial basis with a view to the realisation of profits. Most trades qualify, but some do not. Those that do not are termed ‘excluded activities’ and are:

  • Dealing in land, commodities, futures, shares and other financial instruments
  • Dealing in goods other than in the course of an ordinary trade of wholesale or retail distribution
  • Financial activities
  • Lending, or receiving royalties or license fees
  • Legal and accountancy services
  • Farming, woodland and timber production
  • Property development
  • Operating and managing hotels and nursing homes
  • Coal and steel production
  • Shipbuilding
  • Generation or export of electricity from which Feed-in-Tarriffs are derived
  • Subsidised generation or production of heat, gas or fuel
  • Providing services to another person where that person’s trade consists of excluded activities, and the person controlling that trade also controls the company providing the services

A company can carry on some excluded activities, but these must not be a substantial part of the company’s trade. HMRC take ‘substantial’ to mean more than 20% of the company’s activities.