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HMRC internal manual

Venture Capital Schemes Manual

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EIS: income tax relief: general requirements: meaning of ‘qualifying business activity’

ITA07/S179

The shares must be issued in order to raise money for the purpose of a ‘qualifying business activity’, and the money must be employed for the purpose of that activity.

The term ‘qualifying business activity’ covers the following:

  • carrying on a qualifying trade,
  • preparing to carry on a qualifying trade which the company begins to carry on within two years after the issue of the shares,
  • carrying on research and development, which must either be carried on when the shares are issued or be commenced immediately afterwards, and which the company intends should benefit or lead to a qualifying trade,

The activity may be carried on either by the company issuing the shares or by a company which is, at the date of issue of the shares, a qualifying 90% subsidiary of that company. See ITA07/S190 (VCM13080) for the meaning of ‘qualifying 90% subsidiary’.

Preparing to carry on a trade

‘Preparing’ to carry on a trade covers both the setting up of a new trade and the acquisition of an existing trade from its present owner. Where a company acquires a trade by means of first acquiring the company which carries it on, the acquisition of the shares counts as preparation. However see VCM12060 for periods on or after 6 April 2012.

Preparing to trade does not cover preliminary activities such as market research aimed at discovering whether a trade would be likely to succeed, or raising capital, neither does it cover research and development.

As regards the date when a company begins to carry on a trade, see BIM70501 onwards.

Research and development

In relation to shares issued on or after 6 April 2000, ‘research and development’ is defined in accordance with ITA07/S1006.

In relation to shares issued before 6 April 2000, ‘research and development’ is defined, in accordance with ICTA88/S312(1), as any activity that is intended to result in a patentable invention or in a computer program.