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HMRC internal manual

Venture Capital Schemes Manual

Venture Capital Schemes: companies receiving risk finance investments: 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, in certain specific circumstances, 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 notified State aid approved by the European Commission in accordance with the Guidelines on State aid to promote risk finance investment. It is the company’s responsibility to keep records of any State aids it receives. Notified UK State aids which have been approved under the Guidelines on State aid to promote risk finance investment, other than those listed above, are listed in VCM8121.

The initial investing period is the period that ends 7 years after the company’s first commercial sale (10 years for knowledge-intensive companies).

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. A company may use the date of commencement of trade, or the date the business was started, rather than the date of the first commercial sale for the purposes of applying the maximum age rules if it wishes. The date of commencement of trade and the date the business was started will always be a date earlier than, or the same date as, the first commercial sale. It follows that using the date of the first commercial sale provides a more generous timescale for companies able to identify that date. 

The following examples, 16 to 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.

Example 16

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.

Example 17

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).

Example 18

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.