Not all companies qualify for the Seed Enterprise Investment Scheme that encourages private investors to take a stake in fresh start businesses.
In return, investors pick up some attractive tax breaks – but this are at risk if the company fails to meet SEIS rules.
Helpfully, HM Revenue and Customs lists trades they do not meet qualification for SEIS companies – but does not hint at those that do.
The broad guideline is trades operating as businesses out to make a profit rather than those dealing with investments can opt for SEIS status.
To explain trades that qualify for SEIS, no more than 20% of the company can be set aside for an excluded trade.
Excluded SEIS trades
This is a list from HMRC of excluded trades:
- Dealing land, commodities or futures – defined as shares, securities or other financial instruments
- Dealing with goods except as a retailer or wholesaler
- Financial services – like banking, insurance, asset finance or money lending
- Leasing or letting assets
- Collecting royalties or licence fees unless they are generated by intangible assets created by the company
- Tax, accountancy or law services
- Property development
- Agricultural or horticultural activities like farming and market gardening
- Owning or managing forests or woodlands, including timber production
- Heavy industries like building ships, mining for coal or steel production
- Operating hotels, nursing homes, care homes or similar properties
- Businesses that generate or export electricity involving the Feed-In Tariff
- Providing services to a third party whose business is mainly excluded activities and who also controls the company providing the services
Many of the excluded trades have other specialist tax breaks connected to them – like agricultural business and owning woodlands. The thinking behind excluding them probably relates to not giving double tax breaks to investors.
SEIS qualifying activity
Investors must also watch how a SEIS company spends their investment cash.
HMRC guidance specifies that all tax relief is withdrawn unless:
- All investment capital is spent within three years of the date of the SEIS company share issue relating to the cash injection. HMRC will turn a blind eye to any ‘insignificant’ sum left over
- The money goes towards a qualifying activity
- The issuing company or a 90% subsidiary runs the qualifying business activity
A qualifying business activity is not the same as a qualifying trade – and is defined as either:
- Running a qualifying trade
or
- Preparing to run a qualifying trade
or
- Research and development in advance of a new qualifying trade
