Complicated corporate structures such as Holding and Subsidiary Companies tend to put off investors and can create complications when it comes to SEIS/EIS tax relief. For these reasons we recommend just having a single Company registered on Companies House with the founders as shareholders in their individual capacity.

In this article we’re going to cover the SEIS/EIS rules around your company controlling another company or being under the control of another company or another company and person or persons connected with that company. We’ll also discuss how you could still qualify for SEIS/EIS despite these rules.

If you own a Holding Company and a Subsidiary then you should also have a read of I have a holding and a subsidiary company, what to do about SEIS - EIS?

The Control Test

SEIS

When it comes to SEIS companies must not at any time during Period A, defined as the period from incorporation to the third anniversary of the share issuance, control any company which is not a qualifying subsidiary of the company issuing shares. This applies to both companies that solely own another company and where the company together with any person connected with it own another company.

EIS

During Period B, defined as the period from the date of share issue to three years after, the company cannot control another company which is not a qualifying subsidiary.

‘Control’ is defined in the Income Tax Act as the power of any company or company and connected person by means of the holding or shares or voting power in any company, or as a result of any powers conferred to them by any document regulating the company, that the company’s activities are carried out in accordance with their wishes. The Income Tax Act sets 51% as the threshold for control. In short, if a person or a company or a person connected with a company own more than 51% in the other company then the control test will be met.

Connected Persons’ are persons connected in relation to a company if they act together to secure or exercise control in that company.

Qualifying subsidiary’ is a company that is owned by at least 51% of the investee company whereby the investee company directly or indirectly holds more than 50% of the ordinary share capital. There must be no other person which controls the subsidiary other than the Holding Company. This means that a qualifying subsidiary must satisfy the above test.

The Independence Test

The Independence test is the inverse of the Control Test.

SEIS

A company cannot qualify for SEIS if it is under the control of another company or of another company and any person or persons connected with that other company in Period A. So, it cannot be a subsidiary from the date of incorporation to the third anniversary of the SEIS share issuance.

Example: If Company A owns 51% or more of Company B at any time from incorporation to three years after the share issuance then Company B would not qualify for SEIS.

EIS

The company won’t qualify under EIS if at any time during Period B it is under the control of another company or of another company and any person or persons connected with that company.

The company must not be a 51% subsidiary of another company whereby another company must not directly or indirectly hold more than 50% of the ordinary share capital of the company.

Example: If Company A owns 51% or more of Company B at any time from the share issuance to three years after the share issuance then Company B would not qualify for EIS

The Exception

Under SEIS, for the purposes of Independence, HMRC ignores the ‘on-the-shelf-period’. This is defined as the period during which the issuing company has not issued any shares other than subscriber shares (at incorporation) AND has not begun to carry on, or make preparations for carrying on, any trade or business.

This means that if your company had a corporate shareholder from incorporation that owns 51% or more of your company but your company has only issued shares at incorporation and you are not yet trading or preparing to trade you would still qualify for SEIS. At this point we’d recommend transferring the corporate shareholder’s shares to individuals ahead of any share issuance.

Example: At incorporation a corporate shareholder received 51% shares in Company A along with the founders. The Company has not issued any more shares and has not yet started trading or preparing to trade. The Company then transfers shares from the corporate shareholder, so that it no longer owns 51% or more, prior to trading, preparing to trade or issuing new shares. Company A would then be SEIS eligible.

If your company does not qualify under SEIS because it fails either part of the test above it is possible that it can still qualify for EIS. Under EIS, the Independence Test only applies during Period B i.e. from the date of share issue to 3 years after. So if the company has issued shares other than subscriber shares or has started trading or preparing to trade it can satisfy the Independence Test for EIS if this is addressed prior to the share issuance.

Example: Company B has a 51% corporate shareholder and has already started trading or preparing to trade OR has issued more shares in the company. The company then transfers control away from the corporate shareholder before issuing EIS shares. Company B would then be EIS eligible.

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