A recent Upper Tribunal (UT) decision has highlighted the importance of understanding when a business is legally considered to have “begun trading”, particularly for companies seeking to benefit from the Enterprise Investment Scheme (EIS).

The case involved two companies that issued shares under EIS but failed to secure tax relief for their investors after HM Revenue & Customs (HMRC) determined that they had not commenced trading within the required timeframe.

Background: EIS and the Two-Year Rule

The Enterprise Investment Scheme (EIS) offers valuable tax relief to investors who subscribe for shares in qualifying companies. However, strict conditions apply.

One key requirement is that a company must begin trading within two years of issuing shares for EIS relief to be available.

In this case, both companies intended to generate electricity from gas and raised funds on the basis that investors would qualify for EIS tax relief.

HMRC Challenge

HMRC argued that neither company had begun trading within the required period. The primary issue was that their energy plants were not operational and were not producing or supplying electricity by the deadline.

The companies contended that a business could begin trading before actually supplying goods or services.

Tribunal Decisions

First-tier Tribunal (FTT)

The FTT held that a business begins trading when it is effectively “open for business”, meaning it is ready to supply goods or services and has the necessary infrastructure in place.

As neither company met this threshold, their appeals were dismissed.

Upper Tribunal (UT)

The UT reviewed the case and clarified that the FTT had incorrectly treated certain factors, such as infrastructure readiness, as strict legal tests.

However, after reconsidering the facts, the UT ultimately reached the same conclusion:

• One company’s plant was incomplete and not operational, meaning it could not generate income
• The other company had not yet begun construction and was still planning its operations

The UT found that both companies were still in the preparatory stage, rather than actively trading.

As a result, neither company qualified for EIS relief.

Key Takeaway: Preparation Is Not the Same as Trading

This case reinforces an important distinction:

👉 Preparing to trade is not the same as actually trading.

For EIS purposes, companies must be able to demonstrate that they have genuinely commenced their commercial activities within the required timeframe.

Why This Matters for Businesses and Investors

For companies:

• Careful planning is essential when relying on EIS funding
• Delays in operations can jeopardise investor tax relief
• Professional advice should be obtained early

For investors:

• Tax relief is not guaranteed
• It depends on strict compliance with EIS rules
• Due diligence is crucial before investing

🔎 Q&A: EIS and Commencement of Trade

What is the Enterprise Investment Scheme (EIS)?

A government scheme that offers tax relief to individuals investing in qualifying small or growing businesses.

When must a company begin trading for EIS purposes?

Within two years of issuing shares to investors.

Does preparation count as trading?

No. Activities such as planning, contracting or building infrastructure are generally considered preparatory, not trading.

Why did the companies fail in this case?

They were not operational and could not generate income within the required timeframe.

How can businesses avoid similar issues?

By seeking early legal and professional advice to ensure compliance with EIS requirements.

Contact Us

If you are considering raising funds through EIS, or require advice on commercial, tax-related or business structuring matters, it is important to obtain clear legal guidance at an early stage.

Willett & Co Solicitors provide practical, commercially focused advice to businesses and investors in Bury St Edmunds and across Suffolk.

📞 01284 701323
✉ law@willettsolicitors.com