For many founders raising early-stage funding through the Seed Enterprise Investment Scheme (SEIS), navigating the requirements for the SEIS1 form can be a critical step. This form, submitted after a qualifying share issue, is required to gain HMRC’s approval to issue SEIS certificates to investors. However, it’s essential to understand that SEIS1 cannot be submitted until either:
- The company has been trading for at least four months, or
- It has spent at least 70% of the SEIS funds raised.
Given that investors often push for their certificates as soon as possible, managing their expectations around this timeline can be a challenge. Here’s a practical guide to understanding and applying the four-month trading rule.
What is “Trading” for SEIS Purposes?
HMRC does not provide a precise statutory definition of “trading” for SEIS, but instead relies on broader tax principles and case law. For SEIS1, trading typically means:
- Generating Revenue: Engaging in sales or providing services to paying customers.
- Operating on a Commercial Basis: Conducting business with a genuine profit motive, not just exploratory or preparatory work.
- Assuming Financial Risk: Taking on the commercial risks and rewards of operating a business.
- Sustained Activity: Ongoing and regular business operations, not just isolated transactions.
HMRC’s guidance confirms that merely preparing to carry on a trade is not the same as actively trading. This is explained in their VCM33050 Manual, which highlights that early-stage activities like market research, feasibility studies, or product development do not constitute trading.
Additionally, HMRC’s Business Income Manual (BIM80500) makes it clear that not all activities qualify as trading, even if they involve some revenue or production. The nature, scale, and intent of the activity are critical in determining when trading has genuinely commenced.
Case Law on Trading Start Dates
The question of when a trade actually begins has been explored in various tax cases. For example, in Napier v Griffiths (1990) 63 TC 745, the court ruled that trading commenced when the taxpayer entered into his first contract of engagement as an electronic designer, emphasising that the start of trading is a matter of fact in each case. This precedent reinforces the importance of actual commercial transactions in defining a trading start date. You can read more about this case and its implications in the Business Income Manual (BIM80505).
Additionally, HMRC notes that while trading need not be on a large scale, simply producing and selling a small amount of stock during a trial run might still be classified as testing rather than genuine trade. This distinction can be particularly relevant for technology companies conducting beta tests or pre-launch pilots.
Trading in the Technology Sector
For technology companies, the distinction between preparation and actual trading can be particularly challenging. Activities like software development, platform testing, or beta launches may not qualify as trading until the company starts earning commercial revenue or entering into binding customer contracts.
HMRC’s BIM80515 Manual provides further guidance, noting that the commercial exploitation of intellectual property, such as licensing or subscription sales, typically marks the start of trading. However, purely internal development or technical testing without customer engagement might still be considered preparatory work.
What Doesn’t Count as Trading?
Not all early-stage activities are considered “trading.” Founders should be aware that the following do not generally count as trading for SEIS purposes:
- Market Research and Feasibility Studies: While important for strategy, these are typically seen as preparatory steps.
- Developing a Minimum Viable Product (MVP) without Sales: Creating a prototype alone isn’t considered trading until it starts generating revenue.
- Holding SEIS Funds on Deposit: Simply receiving investment and holding funds does not qualify.
- Generic Subscriptions and Software Tools: Paying for software, platforms, or business tools without active use in trading doesn’t count.
Practical Considerations for Founders
To avoid delays and investor frustration, founders should consider:
- Early Revenue Focus: Aim to secure early customers or contracts as soon as possible.
- Documentation: Keep detailed records of trading activities, including invoices, contracts, and customer communications.
- Clear Communication with Investors: Set realistic expectations about when SEIS certificates will be available, potentially aligning share issue dates with trading milestones.
Further Guidance from HMRC
For a deeper dive into HMRC’s approach to SEIS trading, you can refer to the following key resources:
- Preparing to Trade
- Commencement of Trade
- Relevant Case Law: Napier v Griffiths
- Technology Sector Trading
By understanding these key points, founders can confidently navigate the SEIS1 submission process, ensuring their companies remain compliant while keeping investors informed and satisfied.
