SEIS/EIS, subsidiaries, and control: What you need to know

You’ve done your research. 

You know that the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS) are some of the best ways to attract investors to your business, with impressive tax relief on offer for qualifying investments.

But in order to qualify, companies must adhere to certain eligibility criteria. One that often catches companies out is around company control and subsidiaries. 

So, if you’ve got a holding company, a group ownership structure, or another business registered at Companies House, this could be worth a read. 

Why your company structure matters

To qualify for SEIS or EIS, your company must be: 

• Active (not just a holding company)
• Independent (not controlled by another company)
• Not in control of any non-qualifying subsidiaries 

If your company is a part of a group of companies, or have another business registered alongside your trading company, you need to frame it carefully.

The above qualifying criteria needs to be upheld throughout period A (SEIS) or period B (EIS). Period A is a specific time window starting at either: 

• The date at which the company was incorporated, or
• The date at which the company started trading

Period A then runs until three years after the share issuance, or until the business ceases trading - whichever comes first.

Period B goes from: 

• The date of EIS share issue, to
• Three years later, or
• Until the trade ceases, whichever comes first

If your company fails the control or independence test at any point during period A or B, you could lose SEIS/EIS status, even if you were compliant when the shares were first issued.

What does 'control' mean under SEIS?

In HMRC’s terms, control means one company, or a group of people have the power to direct or influence the affairs of another company. This could be through: 

• Owning more than 50% of shares
• Holding voting rights
• Having powers in company documents (such as a shareholders’ agreement) to make key decisions

If you, or a group of connected people or companies, can effectively run another business, HMRC may consider that you control it.

In light of this, qualifying companies must not:

• Control another company, unless that company is a qualifying subsidiary carrying out a qualifying trade
• Have arrangements in place that will let it control a non-qualifying company, now or in the future

What could arrangements look like?

HMRC has a fairly broad definition on what could constitute arrangements for the purposes of control. These include: 

• Verbal agreements or understandings
• Email chains or deals
• Any series of transactions that could signify a change in control

Even if these aren’t legally enforceable, HMRC makes it clear that this may be enough to disqualify you. So if you’ve had discussions about setting up a future group structure, transferring control, or acquiring another business, this could be something you’ll need to navigate.

The independence test

On the flip side, the test also seeks to uncover if you are under the control of someone else. 

You won’t qualify for SEIS if: 

• You’re controlled by another company
• You’re controlled by people connected to another company
• You’re a subsidiary at any point during period A

There are no exceptions to this rule for SEIS, even if you’re the one who set up the parent company.

For EIS, your company must not be a subsidiary at any time during Period B. 

During this time, your company must not be under the control of another company or another company and its connected persons.

What is a subsidiary, and how does this affect SEIS/EIS?

A subsidiary is a company that is controlled by another company, usually a parent or holding company. In practical terms, this usually means owning more than 50%, or having control over the board. 

It’s pretty common in the UK startup world, however, there’s a catch for those raising through SEIS/EIS: 

If your SEIS-eligible company controls a subsidiary, that subsidiary also has to meet the same trading conditions as your SEIS company. If not, your eligibility is at risk.

You (probably) can have a subsidiary if: 

• It’s 100% owned by your SEIS company
• It’s carrying out a qualifying trade

In other words, if the subsidiary is just an extension of your core trading activity, such as a second office or sub-brand, it’s likely to qualify.

The exception: SEIS and the on-the-shelf rule

Under SEIS, HMRC makes an exception if your company hasn’t started trading or issued any shares beyond those issued at incorporation. This period is known as the ‘on-the-shelf’ period. 

So, if a corporate shareholder owns 51% of your company before you’ve started trading or preparing to trade, and before issuing any new shares - your company may still qualify, so long as that control is removed before you start trading or new shares are issued.

Even if SEIS isn’t available because of early control, you may still qualify for EIS, as long as the company is no longer under control before the EIS shares are issued.

To sum it up

When raising SEIS/EIS investment, your structure really matters. HMRC want to back genuine, independent, early-stage businesses through this scheme - not complex groups or investment vehicles.

Before you apply for Advance Assurance or take on investment, check your structure carefully, especially if you have other companies involved.

With InVestd Raise, you can get this right from day one, with guidance on eligibility, Advance Assurance, investment agreements, and issuing shares.