What is Qualifying Trade (SEIS/EIS)?

The qualifying trade requirement is one of the most important conditions for both SEIS and EIS. It determines whether a company's core business activity makes it eligible to raise investment under these schemes. The rules are set out in the Income Tax Act 2007 and are interpreted by HMRC through their Venture Capital Schemes Manual.

The legislation uses a negative list approach. Rather than specifying which trades qualify, it lists trades that are excluded. If your trade is not on the excluded list, it qualifies. The excluded trades are: dealing in land, in commodities or futures, in shares, securities, or other financial instruments; dealing in goods otherwise than in the course of an ordinary trade of retail or wholesale distribution; banking, insurance, money-lending, debt-factoring, hire-purchase financing, or other financial activities; leasing or receiving royalties or licence fees (as the main activity); providing legal or accountancy services; property development; farming or market gardening; forestry or timber production; operating or managing hotels, guest houses, or similar establishments providing accommodation; operating or managing nursing homes or residential care homes; coal or steel production; shipbuilding; and generating energy where the company receives subsidies such as Feed-in Tariffs, Contracts for Difference, or Renewable Obligation Certificates.

The qualifying trade must be carried on commercially and with a view to making a profit. A hobby or non-commercial activity does not qualify, even if it is not on the excluded list. The company must also have a permanent establishment in the UK, though it can trade internationally. If the company has not yet started trading but is preparing to do so, it can still qualify provided it begins trading within 2 years of the relevant share issue.

For companies with mixed activities, the key question is whether the non-qualifying activities form a 'substantial' part of the overall trade. HMRC generally interprets 'substantial' as 20% or more. This is assessed by looking at several factors including revenue, time, costs, and assets employed. If less than 20% of the overall business relates to excluded activities, the company should still qualify.

When a company applies for advance assurance, HMRC's Small Company Enterprise Centre reviews the description of the trade to determine whether it qualifies. They look at what the company actually does (not just what it says in its articles of association or SIC code), how it generates revenue, and whether any excluded activities form a substantial part of the business.

For straightforward cases such as a technology company, manufacturing business, or retail operation, the qualifying trade test is easily met. For businesses that operate near the boundaries of excluded activities, HMRC may ask detailed questions. For example, a property technology company might need to demonstrate that it provides software services rather than engaging in property development. A financial technology company might need to show it provides technology to financial services firms rather than providing financial services itself.