SEIS Qualifying Trade – is your name on the list?

David Cameron is among those to trumpet the benefits of SEIS, his words:

“The Seed Enterprise Investment Scheme is a world leading incentive for those who invest in start-ups”

It pays to look into SEIS carefully as there are a number of hoops to jump through to qualify for this valuable incentive.  Businesses will be able to more easily attract investment if they qualify for SEIS and investors will not be impressed if you fail to register for SEIS when you could have done so.

 

One of the more controversial limitations surrounds the meaning of the words “qualifying trade” (as the money raised by a SEIS share issue must be used for a qualifying trade).  To help companies who think they may not qualify to see if in fact they do operate a SEIS qualifying trade we have set out some details for you to consider.

 

Qualifying trades are the same as under the existing Enterprise Investment Scheme.  In general, 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 do not to any substantial extent include any excluded activities.

 

And this is where some people are less than happy.  The list of excluded activities includes most property-based commerce (including hotels and other businesses offering overnight accommodation), and professions such as lawyers and accountants, together with some more unusual exclusions such as ship building and coal production.

 

The full list is set out on the HMRC website and at the end of this blog.

Do not instantly despair because your trade is on this excluded activities list however.  There are a few rays of light:

• A company can carry on some excluded activities, but these must not be ‘substantial’ part of the company’s trade. HMRC take ‘substantial’ to mean more than 20% of the company’s activities.
• The provision of services ancillary to these excluded activities may fall within the SEIS remit. For example, providing advisory services in the financial sector is accepted, even though financial activities themselves are excluded. The HMRC Venture Capital Schemes Manual provides “The provision of services, such as advice on financial matters, is not covered by the exclusion”.  This has to be qualified with the caveat that the trade of supplying an individual to perform an excluded activity may not be a qualifying trade.  It has been determined that the trade of supplying an accountant was within the “supply of accountancy services” and was therefore not a qualifying trade.
• Although dealing in commodities is excluded, a manufacturing trade in which a ‘commodity’ is used in the manufacturing process is not regarded as disqualified merely because the company carrying it on buys in the commodity markets and has dealings in the futures markets to even out price fluctuations.
• The general exclusion of an activity of receiving royalties or licence fees is waived where the royalties or licence fees are attributable to the exploitation of certain assets described as ‘relevant intangible assets’. “Intangible assets” bears the definition under normal UK accounting practice and an asset is a relevant intangible asset if it has essentially been created by the company which has issued the shares.

If you consider your trade may be borderline, the safest way to proceed is to apply to HMRC for advance assurance that your entire SEIS proposal complies (on form SEIS AA). HMRC will normally be bound by an assurance, providing that the information on which it is based is complete and accurate and provides all the information needed to allow HMRC to determine whether all the requirements are likely to be met.

 

LIST OF EXCLUDED ACTIVITIES

 

• 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

 

Whatever the investment, it is always worth making sure that you have a Shareholders Agreement or Articles of Association in place that protect the SEIS investor by giving veto powers over any change of direction of the company.  Thus an investor can make sure that the company does not stray from compliance with SEIS into the world of a non-qualifying trade.

Please do get in touch with us on 0207 438 1060 if you have any queries or need assistance in understanding whether your proposed investment or company qualifies for either EIS relief or SEIS relief or on the application and HMRC clearance processes.   Our fees for advising on eligibility for SEIS or EIS start at around £1,250 plus VAT but will vary depending upon the complexity.  Helen Curtis is an associate solicitor in our London commercial law team and regularly advises businesses and investors on EIS and SEIS matters.