The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are UK government initiatives which encourage innovation by granting private investors significant tax breaks when investing in early stage, ‘high-risk’ companies. To learn more about the benefits of and differences between SEIS and EIS tax reliefs, check out our article here.
For your investors to claim and keep (S)EIS tax reliefs, the company which issues the shares must adhere to numerous requirements. Some of these rules only apply at the time the relevant shares are issued, whilst others must be met continuously, for a period of three years. If the company fails to meet one or more of the conditions, investors may have their tax relief withdrawn - therefore it is important to understand the rules!
Which trades qualify?
All trades qualify for (S)EIS, unless they consists wholly, or substantially of ‘excluded activities’. The following text is taken directly from the HMRC website:
Whether or not a trade consists substantially of an ‘excluded activity’ centers around the extent to which it constitutes the company business as a whole. If any excluded activity constitutes 20% of the company as a whole, then the company will be excluded from issuing (S)EIS relief.
What are the excluded activities?
- Dealing in land, including refurbishment activities to make the land more attractive to potential buyers
- Dealing 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. The provision of services, such as advice on financial matters, is not covered by the exclusion.
- Leasing or letting assets on hire, except in the case of certain ship-chartering activities
- Receiving royalties or licence fees through the use of trademarks, or IP rights. This exclusion does not apply if most of the value has been created by the company which has issued the shares.
- Providing legal or accountancy services
- Property development of land in which the company aims to acquire a gain from the disposal of the land when developed.
- Farming or market gardening of land in the United Kingdom and internationally wholly or mainly for the purposes of husbandry, which includes hop growing, the breeding and rearing of horses and the grazing of horses for those purposes.
- Holding, managing or occupying woodlands, any other forestry activities or timber production.
- Shipbuilding, not including ship repairing or conversion
- Coal production, including not only the production, winning or extraction of coal, but also washing, sizing and sorting coal, and transporting of it
- Steel production, not including its transport, warehousing, and the manufacture of finished products from steel.
- Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment - including any establishment, such as a guest house or hostel, where the main purpose is the provision of overnight accommodation, with or without catering services.
- Operating or managing nursing homes or residential care homes, defined as any establishment which exists wholly or mainly for the provision of nursing care for the sick, injured or infirm, or for pregnant women.
- 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
In addition to this, any company which provides services to another, where that other person’s trade consists, to a substantial extent, of excluded activities, and the person controlling that trade also controls the company providing the services, this is an excluded activity. (You can’t be owned by and serve a Company which deals in the excluded activities).
A noteworthy additional business activity is anything relating to the blockchain. Distributed ledger technologies are not excluded from (S)EIS, however, we have found in the past that, at the Advance Assurance stage excessive and unnecessary usage have lead HMRC to reject applications on the basis of being unclear on the business activity. (This goes as far as HMRC having once interpreted a Food Waste Company to be a financial institution, due to their pitch deck!)
Here at SeedLegals, it’s not often see companies which operate close to the definitions of the excluded activities above.
However - where our company has a relationship with any of the markets mentioned above, for example in the fintech space or for tech companies which service the business areas above, it is crucial that your business plan is very clear on the details of why your trade expects to meet the (S)EIS eligibility criteria.
This requirement is one of the reasons why at SeedLegals, every Advance Assurance application includes an expert review - to make sure that nothing is missed, and that your documents are as clear as possible, to ensure an expedited and positive result.
If you have any questions relating to your (S)EIS application, or any of the qualifying trades listed above, feel free to contact us at [email protected] or at the chat icon in the bottom right corner.