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HMRC internal manual

Venture Capital Schemes Manual

Share loss relief: individual and corporate claimants: individual claimants: type of company invested in: qualifying trading company: condition A: trading requirement: introduction

The trading requirement is one of the four requirements of condition A at ITA07/S134, and Condition A is one of the four conditions a company must meet in order for it to be a qualifying trading company.

The trading requirement is set out in detail at ITA07/S137. Many of the particular expressions used are defined in subsection (7) and there is guidance on some of them at VCM71010+. The terms of the trading requirement have changed over the years, and in order to apply the requirement correctly you will need to know when the shares which have been disposed of were issued. The main part of this guidance refers to shares issued on or after 6 April 2007. For guidance on the requirement as it applied to shares issued before that date, see VCM74640.

The trading requirement must be met by a company in its own right: it is not applied to groups of companies or to more than one company taken together. There are two ways in which a company can meet the requirement.

  1. If the company, ignoring any incidental purposes, exists wholly for the purpose of carrying on one or more qualifying trades, then it meets the requirement. There is guidance on the meaning of ‘qualifying trade’ at VCM74620.
  2. Alternatively, if the company is a parent company, the activities of the group which it heads are considered and if the business of the group does not consist wholly or as to a substantial part in the carrying-on of non-qualifying activities then the parent company meets the trading requirement.

Notice that the first approach (a) does not demand that the company actually be carrying on a qualifying trade at the time when it issues shares: the condition is that it have the sole purpose of doing so. It is not enough for it to have a general or vague purpose of carrying on some qualifying trade or another at some time in the future: there must be a current purpose relating to a specific trade. This will be question of fact, and you should seek contemporary evidence of the company’s purpose where it is not clear.

The second approach (b) can be used when a company intends that another company should become its qualifying subsidiary with a view to the subsidiary carrying on one or more qualifying trades. In that case, the first company can be treated as a parent company and ‘the group’ includes the presumed parent and any existing or future company that will be its qualifying subsidiary after the parent’s intention is carried out. This does not apply after the intention is abandoned. This relaxation of the trading requirement helps companies which plan to embark on acquisitions or expansions into qualifying trades to raise capital in advance of those acquisitions or expansions taking place.

Determining the business of a group will involve questions of fact concerning the activities of the group. Note the difference between ‘activities’ and ‘business’ in this context. ITA07/S137 says that when determining the business of the group, you ignore activities of a mainly trading subsidiary so far as they are activities carried on otherwise than for its main purpose. So if a subsidiary company of a group is mainly trading but also holds a small number of investment properties which it leases outside the group then it is possible for the leasing to be ignored when deciding the business of the group providing you are satisfied that leasing is not the company’s main purpose.

When determining the business of a group, you also ignore certain ‘intra-group’ activities carried on by group companies, that is to say:

  • the parent company’s holding of shares or securities in its qualifying subsidiaries;
  • the making of loans by any company to other group companies;
  • the holding or managing of property used by a group company for one or more qualifying trades of a group company;
  • the holding and managing of property used by a group company for purposes of research and development from which a group company’s qualifying trade will be derived or will benefit. (In this context, ‘group company’ includes any existing or future group company).