Contractors, subcontractors, and SEIS/EIS

For fast-growing businesses, using contractors and subcontractors is often a necessity in order to move quickly and take advantage of increasing demand.

External developers, designers, technical specialists, and other key members might be brought in to build, test, or ship your products, all without the overhead that comes with a full-time team.

But when it comes to the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), the way you structure these relationships, and the type of work they carry out in relation to your business model can have a direct impact on whether your company qualifies.

The core rule: Your company must be doing the work

Both SEIS and EIS are designed to support genuine trading companies - not passive entities, holding companies, or businesses that coordinate third parties.

According to HMRC, the company must be carrying out a qualifying trade, meaning that the business activity (the core thing investors are backing) needs to sit within the company itself.

This doesn’t mean that you can’t outsource work, but it does mean that your outsourcing cannot go so far that your company is no longer meaningfully carrying out the trade.

Essentially, outsourcing execution and key technical aspects to help move your business forward is OK, but outsourcing essential business functions may not be viewed in the same way by HMRC.

When contractor work becomes a problem

Using subcontractors becomes a risk when it starts to blur the lines between business activities and ownership.

For example, if your entire product is designed externally, built externally, and maintained externally, and your company’s role is limited to coordinating or reselling that output, it becomes harder to argue that the trade is being carried on by your company.

This is especially relevant for:

• Tech startups outsourcing product development
• SaaS platforms built with agency input
• Businesses relying heavily on a single supplier for multiple outputs

HMRC may question whether the business itself is maintaining enough activity to qualify.

Substance over structure: HMRC’s view

HMRC’s evaluation goes beyond just company structure - they dig into the operation of your business, your growth plans, and how you plan on executing key claims that reinforce eligibility for the schemes.

You might have a a company with:

• Directors and shareholders
• Contracts with external suppliers
• A clear growth business plan

But if, in reality:

• The product is conceived and managed externally,
• The key decisions are made outside the company,
• The company lacks capability to manage its own trade,

then there’s a risk that the company isn’t carrying out its own trade in the eyes of HMRC.

Control and independence matter

Another way to view this HMRC requirement is by looking at the levels of control contractors and subcontractors have on your business output.

Alongside the ‘qualifying trade’ requirement, SEIS and EIS both require that the company is independent, meaning it is not controlled by another company.

Contractor relationships may raise questions where these lines become blurred. This could be that:

• A single supplier is critical to the operation of the business
• The company is commercially reliant on a single external party
• Key decisions that impact operations are dictated externally

Whilst this isn’t traditional control in the legal sense, it can raise red flags with HMRC when they dig a little deeper into how your business operates.

Intellectual property: Where the value lies

A key component of demonstrating your company is carrying out a specific trade is showing that it owns the output of the trade itself - this is where IP comes into play.

If subcontractors:

• Retain ownership of what they build,
• Have hazy licensing back to your company, or
• Have unclear ownership terms,

...then the company may not fully control the product or output it’s supposedly trading.

From an SEIS and EIS perspective, this creates doubt around whether the company applying is genuinely building its own business. That’s why clear IP assignment clauses in contractor agreements are essential - not just as a legal formality, but as evidence that the trade sits within the company.

The ‘shell company’ risk

One of the clearest examples of when over-reliance on subcontractors is when the company begins to resemble a shell company.

This can happen when all meaningful activity is outsourced, the company itself has limited internal capabilities, and the role of the business becomes limited to coordinating suppliers.

At this point, the company begins to act as a mere commercial wrapper to a range of independent contractors and subcontractors. This distinction is key, as the business model presented is no longer functioning as an independent entity at all.

How to use contractors and subcontractors without raising eyebrows

This isn’t to say that outsourcing aspects of your business is prohibited by HMRC. Most SEIS and EIS eligible companies will have elements of their operations that are outsourced - it’s a crucial component of scaling businesses.

However, how this is structured and framed is key in maintaining eligibility. The key is ensuring that the central business model and operations within that are held within the company applying.

In practice, that means:

• The company defines the product or service
• Directors make strategic and operational decisions
• The company retains control over how work is delivered
• Core knowledge and direction sit internally
• All key outputs (especially IP) are owned by the company

Contractors should support the business and its operations, rather than replace it.

Apply for SEIS and EIS with InVestd Raise

If you’re preparing to raise under SEIS or EIS, getting this right early makes all the difference.

With InVestd Raise, you can manage the entire process in one place - from checking your eligibility and structuring your round, to handling HMRC correspondence and submitting your advance assurance application.

When you’re ready, you can issue shares to investors seamlessly and keep everything aligned on a clean, digital platform. If you want to streamline your raise, book a call for a platform demo and see how it works in practice.

You can also use equity to reward key contractors and subcontractors contributing to your growth, with flexible, customisable share schemes, all managed on one seamless digital platform.