Excluded activities: meaning of ‘excluded activities’
In order for investors to be able to claim the reliefs covered by this manual, the company which issues the shares has to meet a number of conditions - see VCM13010 (EIS), VCM34010 (SEIS), VCM55010(VCT) and VCM74610 (SLR). One of the conditions relates to the activities carried on by the company or by the group as a whole. For a single company, the requirement is that it exists for the purposes of carrying on a qualifying trade. Where the company issuing the shares is the parent of a group, the requirement is that the activities of the group as a whole do not consist to a substantial extent of non-qualifying activities. Activities are non-qualifying if they are non-trading activities, or if they are ‘excluded activities’ as explained in the rest of this part of the guidance.
A trade is not a qualifying trade if it consists, at any time in the relevant period, of certain activities, or if such activities amount, in aggregate, to a ‘substantial part’ of it. Those excluded activities are listed for EIS and SEIS under ITA07/S192(1) and this is supplemented by other provisions (S193 to S199).
The equivalent legislation for the VCT scheme is at ITA07/S303(1), supplemented by sections 304 to 310. Note: in certain circumstances a VCT’s holding in a company which is carrying on ‘excluded’ activities may still be regarded as part of the VCT’s qualifying holdings, providing that the holding was either acquired before a given date or was acquired out of funds raised by the VCT before that date. See VCM55020 for more details.
Whether excluded activities amount in aggregate to ‘a substantial part’ of a trade is a matter of fact, to be decided in the light of all the relevant circumstances. No definition of the phrase is provided by the legislation. But where, judged by any measure which is reasonable in the circumstances of the case (for instance, by reference to turnover or capital employed), such activities account for no more than 20 percent of the activities of the trade as a whole, HMRC will normally accept that they are not ‘substantial’.
The phrase ‘to a substantial extent’, which is also used in some parts of the legislation, is interpreted in exactly the same way.
Excluded activities under ITA07/S192(1) and S303(1)
- dealing in land, in commodities or futures or in shares, securities or other financial instruments, VCM3020 see .
- dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution, see VCM3030.
- banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities, see VCM3040.
- leasing (including letting ships on charter or other assets on hire), see VCM3050.
- receiving royalties or license fees, see VCM3060.
- providing legal or accountancy services, see VCM3070.
- property development, see VCM3080.
- farming or market gardening, see VCM3090.
- holding, managing or occupying woodlands, any other forestry activities or timber production, see VCM3100.
- shipbuilding, see VCM3100.
- producing coal, see VCM3120.
- producing steel, see VCM3130.
- operating or managing hotels or comparable establishments or managing property used as an hotel or comparable establishment, see VCM3140.
- operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home, see VCM3150.
- all energy generating activities, see VCM3160.
- any activities which are excluded activities under ITA07/S199 (provision of services or facilities for another business), see VCM3170.