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My client wants to invest in a renewable energy project development company (HoldCo). HoldCo will set up special purpose vehicles (SPVs) to lease land and then seek electricity grid permits and obtain permission to build and operate a wind farm or solar energy array. The SPV would be sold when the project was ready to be built. HoldCo would not carry out the construction work.
Is this activity a qualifying trade for the purposes of the seed enterprise investment scheme (SEIS)? I believe that specific trades are excluded, for example property development. ITA 2007, s 196 says that ‘“Property development” means the development of land:
by a company which has, or at any time has had, an interest in the land, and with the sole or main object of realising a gain from the disposal of an interest in the land when developed.’
I believe this includes redevelopment. Also, for this purpose, ‘interest in land’ is defined as ‘any estate, interest or right in or over land, including any right affecting the use or disposition of land; or any right to obtain such an estate, interest or right from another which is conditional upon the other’s ability to grant it.’
My question is whether HoldCo is, in essence, trading land (or options on land use) or property development? The next owner would be responsible for the construction of the project. Is HoldCo simply creating a viable and valuable SPV?
Finally, would SEIS relief apply if the SPV or land was in, say, Germany?
Query 19,457 – Self Starter.
Reply by ANA
It is important to establish whether the client is trading
The seed enterprise investment scheme (SEIS) is designed to help small, early stage companies raise equity finance by offering a range of tax reliefs to individual investors who purchase new shares in those companies. ITA 2007, Pt 5A provides that income tax relief is available on up to 50% of subscriptions for qualifying shares up to £100,000 a year as long as specific requirements are met. Further, there are capital gains exemptions on shares that qualify for SEIS relief and assets if the proceeds are reinvested under SEIS (TCGA 1992, s 150E and Sch 5BB).
The investee company must be a trading company or the parent company of a trading group (ITA 2007, s 257DA). Any trading activity will qualify for these purposes unless it is an excluded activity within the definitions used for the enterprise investment scheme (ITA 2007, s 192 to s 199). First, Self Starter needs to establish whether his client is trading. On the information provided in the query this seems unlikely because HoldCo is simply establishing and selling special purpose vehicles with an interest in land. Self Starter will need to assess the proposed transactions by reference to the badges of trade. A good summary of the relevant tax cases and HMRC’s approach is in the Business Income Manual beginning at BIM20200.
Self Starter is correct that ITA 2007, s 196 specifically excludes property development. If he concludes that the client’s activities do constitute trading he will need to determine whether his client falls within this definition. At first sight, it does because all HoldCo is doing is establishing and selling SPVs whose main asset is land.
To claim relief the investee company (HoldCo in Self Starter’s client’s case) must be in the UK (ITA 2007, s 257DD). However, there is no requirement within the relevant tax legislation for the underlying investments or assets to be in the UK.
Reply by John Kingsley, Atlantic Tax Advisory
In principle, the companies’ assets can be abroad
Self Starter has asked about the nature of HoldCo’s activities (is it dealing in land?) but that is not how the SEIS rules are applied in the corporate group context. These require the commercial activities undertaken by HoldCo’s subsidiaries to be considered in the round.
The SEIS legislation does not define a trade as such, beyond saying that it must be conducted on a commercial basis. This question can be determined only by the application of general tax principles. In this case, the SPVs will be formed with the stated objectives of acquiring leasehold interests in land and seeking to obtain grid permits and planning permissions. The SPVs would then be sold with the leasehold interests and permissions in place. Importantly, the SPVs will not sell the leaseholds and the SPVs’ new owners will carry out the construction work.
In these circumstances, it is questionable whether the SPVs’ proposed activities amount to a trade at all. If they are trading, what is the nature of their trade? The SPVs cannot be dealing in land (no land sales will be made by them), so are they carrying out a property development trade?
Self Starter has correctly identified that property development is on the statutory list of SEIS excluded activities. Disappointingly, HMRC’s guidance (Venture Capital Schemes Manual at VCM3080) adds nothing to s 196, which is summarised in the query. However, we do know that the SPVs will seek to obtain various permits and permissions.
The case of Taylor v Good [1974] STC 148 indicates that seeking planning permission is not, of itself, sufficient to support a property development – trading – analysis.
Given HMRC’s enthusiasm for deploying alternative arguments in disputed SEIS and EIS cases, it is entirely foreseeable that it would contend that the SPVs’ intended activities are either not trading at all or are property development and should therefore be excluded, preventing the investors from claiming SEIS relief either way.
Self Starter has also asked whether an SPV or the land to be acquired can be located overseas. In principle, they can be – the SEIS legislation is silent on the location of assets owned or used by a qualifying company, which can be non-UK resident. It does feature a stringent UK permanent establishment requirement, the details of which are set out in VCM34050.
