The basic age condition: first commercial sale
ITA07/S175A (for EIS)
ITA07/S280C and section 294A (for VCTs)
There is a general limit on the age of a company when it receives its first relevant investment, referred to here as the “basic age condition”. Otherwise, an investment made after that time must meet one of conditions A, B or C to be eligible.
Together, the rules ensure that tax relief is targeted on investments in earlier-stage companies, companies that need several rounds of tax-advantaged funding before the market will invest in them and, exceptionally, companies whose activities are changing so substantially as to constitute a new business activity.
The basic age condition
A company will meet the basic age condition if a relevant investment is made before the end of its initial investing period.
A relevant investment is defined under sections 173A (for EIS) and section 280B (for VCTs) as:
- An investment of any kind made by a VCT
- An issue of shares in respect of which the company provides an EIS compliance statement (EIS1)
- An issue of shares in respect of which the company provides an SEIS compliance statement (SEIS1)
- An investment made in a social enterprise (shares or loan) in respect of which the social enterprise provides an SITR compliance statement (SITR1)
- Any other investment which is a State aid approved by the European Commission in accordance with the Guidelines on State aid to promote risk finance investment. HMRC does not have a list of all State aids. It is the company’s responsibility to keep records of any State aids it receives.
The initial investing period is the period that ends 7 years after the company’s first commercial sale (10 years for knowledge-intensive companies) unless, exceptionally, an older company meets certain conditions (see the section on new product and geographic markets below).
The first commercial sale is defined by reference to the European Commission’s Guidelines on State aid to promote risk finance investments. Paragraph 52(xi) of the Guidelines defines a first commercial sale as “the first sale by an undertaking on a product or service market, excluding limited sales to test the market”.
In most cases the date of the first commercial sale is likely to be at or around the time the company starts to trade but in some cases it may be later than the date the company starts to trade.
The following examples, 16 – 18, illustrate the concept of the first commercial sale for a start-up company where the company has no subsidiaries and has never traded through a business which it acquired from another person.
Company A is incorporated on 1 January 2015 to carry out domestic roofing work. The company’s first supply to a customer is on 31 March 2015. The company builds up its expertise and reputation and in September 2020 it wants to expand into roofing historic buildings. It needs money to engage specialist staff and buy new tools and equipment. Its first commercial sale was on 31 March 2015, less than 7 years earlier. The company meets the age condition.
Company B is incorporated on 1 January 2015 to develop a specific type of medical equipment. The company is privately funded. The company develops a prototype by December 2016 which it provides to a hospital for testing for a token fee. The prototype is not successful and work continues on development. Further prototypes are tested and the company starts to market its product to the medical profession in January 2019. The first commercial sale is made on 1 June 2019.
The company decides it needs to raise more money to fund further developments of the product. The company has until 31 May 2026 if it wishes to raise funds through EIS or VCT investors (or 31 May 2029 if it is a knowledge-intensive company at the time of raising the money).
The facts are the same as before except that before the first commercial sale on 1 June 2019 company B contracted out the services of one of its members of staff to another company for 6 months in 2017.
The contracting out of the staff member’s services for a short period would not be regarded as a commercial sale because it is a minor, one-off, transaction compared with the company’s other activities. The company is still carrying on the business for which it was incorporated, to develop and sell the medical equipment.
However if the company had started to carry on activities or transactions before 1 June 2019 which provided a more regular income stream or represented a substantial part of the company’s activities, the date of the first commercial sale would be the date of the first sale made through those activities.