You must take care to avoid “excluded activities” if you want to claim SEIS or EIS relief.
Excluded activities can affect SEIS and EIS. Both schemes offer excellent tax breaks to investors and many start-ups use the schemes to raise funds.
A qualifying trade is defined by HMRC as a trade which is conducted on a commercial basis with a view to the realisation of profit. Whilst most business activities qualify there are a number of important business types that are excluded.
Which Activities Are Excluded?
- Dealing with land, commodities and financial instruments
- Property development
- Providing legal or accountancy services
- Financial activities such as banking, insurance, debt-factoring or any other financial activities
- Operating or managing hotels or nursing/care homes
- Farming and market gardening
- Leasing or letting of assets on hire
- Operating or managing hotels
- Coal and steel production
- Generation of electricity, heat, gas or fuel
Trades Which Don’t Qualify
A trade does not qualify if it consists wholly, or substantially, of ‘excluded activities’. You can carry on some excluded activities, but they can’t be substantial. In other words, they can’t form more than 20% of the company’s total activities.
There are a number of further conditions which must be met in order for a business to use the SEIS or EIS schemes. For example, there is a limit on the number of employees that the investee company can have at share issue.
The company must have less than 25 full-time employees for the SEIS and less than 250 full-time employees for the EIS or their part-time equivalents. For groups of companies, the limit applies across the group. There are higher limits for ‘knowledge-intensive’ companies.