The Enterprise Investment Scheme (EIS), and Seed Enterprise Investment Scheme (SEIS) offer very attractive benefits to investors. Investors can only claim tax relief if the company meets certain conditions, one of these being the type of business which it operates.  

We are often asked for our advice on whether a business will qualify for these tax reliefs and with our wide experience in this area we can offer our view based on our past clients and dealings with HMRC. The rules laid down by HMRC give an overview but not all businesses fit neatly into them, and there will always be grey areas.

Most trades qualify but there are a number of excluded activities in each of these schemes. It is important to remember that activities are only excluded if a substantial element of the company’s trade consists of the ‘excluded’ activity. There is no formal definition of ‘substantial’, but a general rule is no more than 20% of the trade. This 20% benchmark applies to the company as a whole, so the parent company may well qualify for SEIS or EIS status whilst a subsidiary may not.

So let’s look at what the rules currently dictate for trades excluded from EIS and SEIS: 

• Dealing in land, in commodities or futures or in shares, securities or other financial instruments. Dealing in land includes circumstances where steps are taken, before selling the land, to make it more attractive to a purchaser. This could include activities such as the refurbishment of existing buildings. Dealing in commodities covers any dealings done on the commodities market.
• Dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution. ‘Goods’ are not defined in the legislation, however HRMC note a number of items which have been specifically judged not to be ‘goods’, which include land, currency, cheques, and human remains.
• Banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities. The ‘other’ financial activities are comparable with those listed, in particular, those associated with money lending or taking on the customer's financial risk. The provision of services, such as advice on financial matters, is not covered by the exclusion.
• Leasing (including letting ships on charter or other assets on hire). This includes activities such as furnished letting and the letting of holiday caravans, where these activities amount to trading.
• Receiving royalties or licence fees. The receipt of royalties or licence fees can arise in a trade through the use of trademarks, patent rights, copyright and know-how. This exclusion does not apply if the greater part of it in terms of value, has been created by the company which has issued the shares. Licence fees can also arise in relation to the exploitation of rights over land. HRMC note sports centres and leisure facilities as examples of trades that may in some cases involve the receipt of this type of licence fee.
• Providing legal or accountancy services. No need to say any more on this as it is simply as stated.  
• Property development. This is defined as the development of land in which the company has, or has had, an interest, with the object of realising a gain from the disposal of the land when developed. This will also cover redevelopment.
• Farming or market gardening. This includes the occupation of land in the United Kingdom and internationally wholly or mainly for the purposes or husbandry, but excluding market gardening. ‘Husbandry’ includes hop growing, the breeding and rearing of horses and the grazing of horses for those purposes, as well as short rotation coppicing. Farming is not necessarily a trade in the proper sense of the word, but is treated as a trade for all tax purposes.
• Holding, managing or occupying woodlands, any other forestry activities or timber production. This covers everything from the planting of trees to the harvesting of timber, to the extent that they constitute or are part of a trade. They apply whether or not the company owns the woodland. The processing of raw timber is not covered.
• The subsidised generation or export of electricity. This includes the generation or export of electricity where a feed-in tariff under a UK government scheme is received. Currently several methods of production of electricity and several types of company are specifically not excluded by the legislation. However, in the 2015 Autumn statement, the Government announced that all remaining energy generation activities will be excluded from 6 April 2016./blog/eis-seis-sitr-the-2015-autumn-statement-changes

• Operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment. This is wider than ownership of a hotel, but applies only where the company occupies the premises or has some legal interest in them. Interestingly there is no established definition of ‘hotel’, and HMRC will look to the marketing material, and its treatment by a local authority in determining the qualifying trade. The exclusion extends beyond hotels to 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 or managing property used as a nursing home or residential care home. This is similar to the hotel exclusion as it wider than ownership, but applies only where the company occupies the premises or has some legal interest in them. A nursing home is defined as any establishment which exists wholly or mainly for the provision of nursing care for:

• •      the sick, injured or infirm, or for the provision, or
•      women who are pregnant or who have given birth.

     Whilst residential care is defined as any establishment which exists wholly or mainly for the          provision of residential accommodation, board and personal care for those who need such            care because of:

•      old age,
•      mental or physical disability,
•      past or present dependence on alcohol or drugs,
•      any past illness,
•      past or present mental disorder.

• 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. This exclusion exists to ensure that there is no abuse of the rules by a controlling company or person.   

The following exclusions apply to a holding acquired on or after 6 April 2008 unless the holding was acquired out of funds raised by the VCT before that date.

• Shipbuilding. This relates to commercial vessels with the specific definition being the building of ‘self-propelled seagoing commercial vessels’. To meet this definition vessels have to have permanent propulsion and ‘all the characteristics of self-navigation on the high seas’. Vessels of less than 100 gross tonnes (or tugs of less than 365KW) are not covered by this exclusion. Ship repairing or conversion is not regarded as shipbuilding, so those activities are not excluded.
• Producing coal. This covers not only the production, winning or extraction of coal, but also consequential activities such as washing, sizing and sorting coal, and transporting it to the point of delivery.
• Producing steel. The transport or warehousing of steel, and the manufacture of finished products from steel, are not excluded activities.

So those are the rules as they currently stand, it may look like a long list but I can assure you that there are plenty of trades that do qualify. At Sapphire Capital we would recommend that a company seeks advance assurance from HRMC before issuing any investor shares. This will eliminate any uncertainty and will give the investor comfort that their investment in your business will qualify for the tax incentives offered by SEIS and/or EIS.

If you are interested in the advance assurance process, or investing, or attracting investment into your organisation, and would like our help please contact us at Sapphire Capital Partners LLP. We are happy to help.