SEIS Qualification And Length Of Trade If Setting Up A New Company

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  • #2847

    Jonathan Lea
    Keymaster

    We posed the following questions to HMRC concerning SEIS qualification criteria:

    Background facts

    1) The founders of an existing company (which has been trading for three years) (“Existing Co”) are setting up a new company (“New Co”).

    2) New Co will operate a similar business to the Existing Co, albeit New Co will be working on new projects distinct from the ones produced by the Existing Co.

    3) The Existing Co will become a wholly owned subsidiary of New Co whereby the founders of the Existing Co will transfer their shares in Existing Co to New Co in exchange for shares being issued to the founders in New Co.

    4) The founders want individual investors to invest in New Co in the expectation that they wil be able to claim SEIS tax reliefs.

    Questions

    A) Given that New Co will have a wholly owned subsidiary (Existing Co) that has been operating a very similar business to New Co for the last three years, will investors in New Co still be able to claim tax reliefs pursuant to SEIS?

    B) If the Existing Co as a wholly owned subsidiary of New Co would invalidate the SEIS tax reliefs would investors in New Co still qualify for SEIS tax reliefs if the Existing Co is not a wholly owned subsidiary of New Co, but remains separate with the founders remaining as its shareholders?

    #2848

    Jonathan Lea
    Keymaster

    HMRC replied with the following:

    “When we look at whether or not a company will qualify for SEIS, we look at the length of the trade. The trade could be in existence in any entity for example- sole trader before transferring into a company. The trade may well then transfer to another newly incorporated company, but we would look at when it commenced in the sole trader to determine the start date.

    The problem therefore is that the trade is 3 years old already. If a similar activity is carried on, it may be difficult to argue that it was a different trade and not part of the original trade. As such the company may not be successful in obtaining SEIS.

    I would check the date the trade commenced (typically this is when principal photography is undertaken in this industry) to ensure it is 3 years old.

    The company may wish to consider EIS as an alternative. However, it would have to fulfil the growth and development requirement. Link to guidance here: https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm8130

    From the above it is apparent that in such a situation you or your advisor should take care to explain clearly in the covering letter that goes with the SEIS advance assurance application why and how the new business is different and completely new compared to the previous one.

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