IFM40255 - Eligibility criteria: activity condition

FA22/SCH2/PARA13(1)

A company must meet the activity condition if it is to be eligible to be a QAHC. In addition, a company must meet the condition in order to be an intermediate company within PARA 11 (IFM40250). This requires that (a) the main activity of the company is the carrying on of an investment business, and (b) that any other activities of the company are ancillary to that business and are not carried on to any substantial extent.

The reference to ‘an investment business’ is capable of being read as ‘investment businesses’ in accordance with section 6(c), Interpretation Act 1978. This states that words in the singular also include the plural. Therefore, a company carrying on multiple investment businesses will still meet this definition provided any other activities are ancillary to at least one of the investment businesses and not carried on to any substantial extent.

The intention of the condition is that the capacity of QAHCs to carry on trades should be very limited: they are asset holding companies, and trading is not a part of the role of holding assets. For example, a real estate holding company undertaking a mixed development where it was building a site partly for long term rental yield and partly for sale on completion would not meet the condition, since the development for sale part of its activity would be a trade that was not ancillary to the investment activity (and would also likely be substantial).

The first limb of the condition is met when the company is initially seeking investments but has not yet acquired any. Likewise, the condition is met if a QAHC has sold its last investment asset but retains contractual rights or obligations in relation to previously held investments (such as entitlements to deferred sale consideration, or contingent liabilities under warranties and indemnities given on sale).

The second limb of the condition excludes trading activity, except where it is ancillary to the investment business of the company and not carried on to a substantial extent. The provision of intra-group management services to investee companies could be an example of acceptable activity falling within the second limb condition.

As a general rule, in order to meet the ‘not carried on to any substantial extent’ part of the test, the quantum of possible profit from the trading activities should be sufficiently limited that no potential investor in the company should be expected to have regard to it in deciding whether or not to invest (ignoring for these purposes that the entity paying trading income to the company may be a subsidiary so that the consolidated impact of the payment is nil).

If a QAHC undertakes a transaction which is taxed as if it was a trading transaction under the special rules for transactions in land (CTA10/PART 18), that will not be regarded as trading activity for the purposes of the activity condition. The deeming provision in the transactions in land rules only taxes the transaction as if it were a trade – it does not deem a trade to be carried on for all tax purposes.

Guidance around distinguishing between trading and investment activity for the purposes of the activity condition is at IFM40260.