A guide on how to satisfy the new qualifying trade requirement, and how to address potential continuation of trade for directors.
What is the rule and what is its purpose?
One of the requirements of the SEIS/EIS scheme is that the funds go towards a new qualifying trade - this means that neither the company, nor any other person from that company, has carried out the trade for longer than two years at the date of issue of the shares. This also includes where neither the company nor any qualifying subsidiary has carried out any other trade before the company applying began to carry on the new trade, (as set out in S.257HF of the Income Tax Act 2007).
As part of your Advance Assurance application, HMRC will verify whether any directors of the company applying have also been, or still are, directors of other companies on Companies House. They will be looking out for other companies that have a similar business purpose and nature to the one applying - so any companies that have a similar name, or are listed under a similar SIC code, could get flagged.
The goal is to prevent applicants that have shut down their previous company and set up a new company, using the same business plan, contacts, experience, to then apply for S-EIS relief. Part of this rule goes to HMRC’s risk to capital requirements, as it would minimise the possibility that investors stood to lose more than they gained if the directors had the expertise to run the company. This will ensure that directors cannot circumvent the two year trading limit - it is not enough for the company applying (or the group of companies) to fall within the 2 year trading limit. Instead, the directors themselves cannot be involved in the trade via other companies that might avoid the limit.
If you, or one of the directors of the company applying, have also been directors of another company (or companies) with a similar name or business nature, we recommend you directly address this in your application. You can include a sentence in the additional information of your Application Form that states “X Director is also a director of X company, but this company has not engaged in any trading activity/has a different business purpose to company applying, and there is no continuation of trade between these companies”.
What happens if you do fall into the continuation of trade limitation?
There are a couple of options here:
1. If you satisfy the trading limit for SEIS/EIS
If you satisfy the trading limit for S-EIS, i.e. you prove that the previous company has not engaged in trading for over 2 years for SEIS (or 7 years for EIS), you can mention this in the application to HMRC. In this case, it's unlikely that HMRC will see this as a breach of the continuation of trade requirement - we can advise on how best to do this.
2. If you are over the trading limit (2 years for SEIS, 7 years for EIS)
If the previous company is over the 2 year trading limit (within the 7 year limit), the company can apply for only EIS (as long as you are raising over £150,000).
If you are over the 7 year trading limit and therefore unable to claim EIS, we recommend looking at Condition B (S.175A Income Tax Act) - you will have to prove that the new company is moving into a new product market or geographical market. Please see our guide on Condition A and B if your company is seeking to issue EIS shares after the 7 year limit.
For more information on what trading is for SEIS/EIS please refer to our articles: