EIS: qualifying & non-qualifying trades
In this blog, we will be looking at the non-qualifying trades under Enterprise Investment Scheme (EIS) scheme. EIS is a government-approved scheme that helps early-stage yet ambitious businesses to find investors easier. This scheme offers tax relief to individual investors which increases your chances when fundraising.
Under the EIS scheme, you can raise up to £5 million each year and a maximum of £12 million in your company’s lifetime (including other venture capital schemes). Some companies can apply as knowledge-intensive which brings thresholds even higher.
For investors to be able to claim their tax reliefs, the company must meet several EIS conditions. One of those conditions is that the money raised under the EIS scheme must be used for qualifying business activity by the company or by the group as a whole. Which is either:
- a qualifying trade
- when preparing to carry out a qualifying trade (which must start within 2 years of the investment)
- research and development that’s expected to lead to a qualifying trade
The requirement for a single company is that its whole purpose is to carry on a qualifying trade. When the company is the parent of a group, then the activities of the group must not consist to a substantial extent of non-qualifying activities. Non-qualifying activities are non-trading activities or activities that are ‘excluded activities’ stated below:
- dealing in land, in commodities or futures or in shares, securities or other financial instruments;
- dealing in goods otherwise than in the course of an ordinary trade of wholesale or retail distribution;
- banking, insurance, money-lending, debt-factoring, hire-purchase financing or other financial activities;
- leasing (including letting ships on charter or other assets on hire);
- receiving royalties or licence fees;
- providing legal or accountancy services;
- property development;
- farming or market gardening;
- holding, managing or occupying woodlands, any other forestry activities or timber production;
- producing coal;
- producing steel;
- operating or managing hotels or comparable establishments or managing property used as a hotel or comparable establishment;
- operating or managing nursing homes or residential care homes or managing property used as a nursing home or residential care home;
- all energy-generating activities;
- any activities which are excluded activities under ITA07/S199 (provision of services or facilities for another business).
What is the substantial part or substantial extent?
Whether excluded activities amount in aggregate to ‘a substantial part’ of trade, is decided depending on the relevant circumstances. No exact definition is being provided by the legislation. But where, judged by any measure which is reasonable in the circumstances of the case (for instance, by reference to turnover or capital employed), such activities account for no more than 20 per cent of the total activities as a whole, HMRC normally accepts that they are not ‘substantial’. The phrase ‘to a substantial extent’ is interpreted in the same way.
To find out more information if your business qualifies please read our blog about EIS requirements. To get support on your application please get in touch via our website and one of our experts will be delighted to help you out.