SEIS: income tax relief: issuing company: trading requirement
The investee company - that is, the company issuing the shares - must fall into one of two categories. It must either exist for the purpose of carrying on a new qualifying trade or it must be the parent company of a group whose business is essentially that of carrying on qualifying activities. See below for the meaning of ‘new qualifying trade’.
If the company is a single company it must exist wholly for the purpose of carrying on a new qualifying trade or trades. See below for the meaning of ‘new qualifying trade’.
The purposes for which a company exists fall to be ascertained primarily by reference to what, through its directors and employees, it actually does, and not, for example, by reference to the intentions of those who originally formed it. A new company whose directors are actively engaged in setting up a trade should not be regarded as failing to satisfy the rule merely because it is not yet trading and a large part of its funds is temporarily being held on deposit. However, the making of investments which are less easily realisable is likely to lead to the conclusion that the company exists for investment purposes, even if there is an intention to trade at a later date.
The cessation of trading, other than an involuntary and temporary cessation caused by some eventuality such as a fire, will normally mean that the company ceases to exist for the purpose of carrying on a trade. But there is no reason why the company should not cease one trade and begin another, provided the interval between the two activities is brief.
As regards a cessation of trading caused by the company or a subsidiary becoming insolvent, see VCM34030.
For a company to be a parent company it must have one or more qualifying subsidiaries (see VCM34140). This includes companies that become qualifying subsidiaries during the relevant period.
Non-qualifying activities carried on must not amount to a substantial (see VCM3010) part of the business.
The way this rule is applied is as below.
The following types of activity are ignored altogether:
- holding shares in a subsidiary, making loans to a subsidiary, and making loans to the parent company,
- holding and managing property used by any group company for the purpose of a trade or of research and development,
- insignificant activities, where the particular company which carries them on exists for the purpose of carrying on a trade.
Everything else done by any company in the group constitutes ‘the activities of the group taken as a whole’.
Any activities in the following categories have to be identified:
- trades, or activities which are parts of trades, which are on the list of excluded activities in VCM3010,
- activities which are not carried on in the course of a trade, other than research and development (for example, investment in property or shares).
Such activities must not form a substantial part of the activities of the group as a whole.
The wording of the provision allows us to disregard any trivial or incidental activity.
New qualifying trade
A ‘new qualifying trade’ is defined in S257HF as being one which has not been carried on by either the company or by any other person for longer than two years at the date of issue of the shares; and where neither the company nor any qualifying subsidiary had carried on any other trade before the company in question began to carry on the new trade.
For a trade to be a qualifying trade, it must be conducted on a commercial basis and with a view to the realisation of profits - see the guidance at BIM85705 and BIM85710.
In addition, the trade must not consist wholly or as to a substantial part in the carrying on of ‘excluded activities’ - see VCM3000+.
See VCM37030regarding the special rules applying where the company participates in a share exchange that results in the insertion of a new holding company over it.
See VCM34030 regarding the rules applying if the company goes into liquidation, receivership or administration.