In the case Putney Power Ltd v Revenue and Customs Commissioners, the core issue revolved around whether the company had commenced a "qualifying trade" for the purposes of the Enterprise Investment Scheme (EIS) under section 189 of the Income Tax Act 2007. The concept of "trade" in this context is critical because EIS relief is only available to companies that are actively engaged in a qualifying trade within a specified period after issuing shares.
The appellants, Putney Power Ltd, had constructed power stations with the intention of generating and selling electricity. They argued that the construction phase itself constituted the commencement of a trade. They issued shares in April 2016 with the expectation that individuals subscribing to these shares would benefit from EIS relief, which offers a tax reduction and potential capital gains exemptions for investors in qualifying companies. However, for the relief to apply, the company needed to have started a qualifying trade within two years of issuing the shares, i.e., by April 2018.
HMRC disputed this claim, arguing that merely constructing the power stations was not sufficient to constitute the start of a trade. Instead, HMRC maintained that the trade had only begun once the company was actually generating and supplying electricity. As such, the company had not met the legal requirement to begin a qualifying trade by the EIS deadline, and the shares were not eligible for the tax relief.
The Tribunal upheld HMRC’s position, emphasizing that a trade begins when the company is "open for business." This means the company must be ready and able to provide its goods or services to the market. It is not enough to simply have the infrastructure in place or be in the process of preparing for business operations. The company must have taken concrete steps that expose it to real operational risks and rewards, such as signing contracts, incurring costs, or generating revenue.
The Tribunal clarified that even though the infrastructure (in this case, the power stations) did not need to be fully operational on a large scale, the company must be in a position where it could provide the services it intended to offer. The commercial reality of the business must reflect actual readiness to trade. Simply put, having the capability to start generating electricity, or even engaging in preliminary activities like acquiring assets or hiring staff, does not constitute the commencement of trade until the business is actively open for business and engaged in providing the product or service.
Thus, the ruling reinforces that for companies seeking EIS relief, it is critical to understand that preparatory activities or asset construction do not equate to the commencement of trade. Only when the company is actively trading and exposed to business risks will it qualify under the statutory requirements for EIS relief. This case serves as a cautionary tale for businesses to ensure they meet the operational and timing requirements when seeking investment through schemes like the EIS.