VCM13060 - EIS: income tax relief: the issuing company: meaning of ‘qualifying trade’

ITA07/S189

Either the company or at least one of its qualifying subsidiaries must exist for the purpose of carrying on a qualifying trade. For a trade to be a qualifying trade, it must be conducted on a commercial basis and with a view to the realisation of profits - see the guidance at BIM85705 and BIM85710).

In addition, the trade must not consist wholly or as to a substantial part in the carrying on of ‘excluded activities’ - see VCM3000+.

What the company does must come within the ordinary meaning of ‘trade’; that is, it must not count as a trade merely because of the extension of the meaning of that word in ITA07/S989 to include ‘any venture in the nature of trade’.

In deciding whether a business is a trade what matters is whether it is actually, or is treated for all purposes of the Taxes Acts as, a trade, not whether the profits from it are assessable under CTA09/PT3 (Trading income).

Thus:

  • concerns, such as quarries and gravel pits, whose profits arise out of land and which are brought in by CTA09/S39 are not necessarily trades; each case must be considered on its merits,
  • the commercial letting of furnished holiday accommodation, which is treated under CTA10/S65 as a trade for certain purposes only, is not a trade.

For shares issued on or after 6 April 2011 there is no longer a requirement that the trade be carried on wholly or mainly in the United Kingdom. Instead, the requirement is that the issuing company must have a permanent establishment in the UK (see VCM13020).

Activities of research and development from which it is intended that a ‘connected’ qualifying trade will be derived or will benefit is itself treated as a qualifying trade. (A ‘connected’ qualifying trade is one carried on by the company that undertakes the research and development or any other member of the same group). Preparing to carry on research and development does not count as preparing to carry on a qualifying trade (see ITA07/S179 (VCM12100).

Subject to the above matters, all trades are qualifying trades except as set out in VCM3000+.