Why this matters
If customers mainly pay you to use a space, a court, a room or a piece of kit, HMRC may treat your trade as leasing or licensing, and SEIS/EIS will be refused.
This is now the most common reason HMRC queries or refuses venue-based applications. Padel and racket clubs, gyms and studios, coworking (including with childcare), saunas and wellness venues, event spaces, storage and equipment hire are all affected. Since 2025 HMRC has taken a noticeably harder line, especially on padel.
You can potentially still qualify. What matters is showing that you sell a service that happens to use property, not access to property with a few extras. You need to show that in two places: where your money comes from (revenue) and where your money goes (costs and capital).
The legislation
The rules sit in the Income Tax Act 2007 (ITA 2007). HMRC quotes the same sections in almost every leasing or licensing query.
| Section | What it says | Why it matters to you |
|---|---|---|
| s.257DA (SEIS) and s.181 (EIS) | The company must exist wholly to carry on a qualifying trade throughout "period B" (from share issue to the end of the qualifying period) | A trade that becomes mostly hire or licensing later can still lose relief |
| s.189 | A qualifying trade must not consist "wholly or as to a substantial part" of excluded activities | Some excluded income is allowed, but not a substantial part |
| s.192(1)(d) | Leasing is an excluded activity ("including letting ships on charter or other assets on hire") | Renting out space, courts, rooms or equipment |
| s.192(1)(e) | "Receiving royalties or licence fees" is an excluded activity | Charging people for permission to use your property, e.g. court or desk bookings |
The legislation does not define "leasing", "licensing" or "substantial". That is why HMRC's guidance and Tax Bulletin 54 carry so much weight.
HMRC's guidance: the Venture Capital Schemes Manual
HMRC's Venture Capital Schemes Manual (VCM) is what caseworkers apply day to day. Four pages matter here.
| VCM page | Topic | Key point |
|---|---|---|
| VCM3010 | Excluded activities: "substantial part" | No more than 20% "by any measure which is reasonable" is normally not substantial |
| VCM3050 | Leasing | "The legislation excludes leasing (including letting ships on charter or other assets on hire)" |
| VCM3060 | Royalties and licence fees | These arise where property rights are exploited "by granting permission to others to make use of that property" |
| VCM3200 | Tax Bulletin 54 (August 2001), reproduced in full | Sets out when a licence is "merely incidental" to a service, with the health club and cinema examples |
VCM3200 is the page you will argue from. Read it before you finalise your business plan, not after HMRC writes to you.
Tax Bulletin 54
Tax Bulletin 54 (reproduced at VCM3200) draws the line between hiring out property and providing a service that uses property.
Leasing. A lease applies where "the customer is free to use the property for the purpose for which it is intended", subject to reasonable conditions set by you. A bookable court, desk, room or sauna that the customer simply uses looks like this.
Licensing. "Licences may be granted as a means of exploiting an interest in land. But in some situations, the grant of the licence is merely incidental to an activity of supplying services." The licence is fine if it is incidental to the service; it is excluded if it is the product.
What HMRC looks at. The bulletin weighs the level of services and the work done to keep the property fit for use, including "the extent to which the fees relate to the cost of such work". It contrasts the "simple activity of making sports facilities available… with no provision of services" (excluded) with businesses where services dominate.
The two examples founders rely on:
- Health club. Members' fees pay largely for a "high level" of services and qualified staff alongside use of equipment, so the licence is incidental. HMRC uses this both ways: in one coworking case it accepted the analogy for gyms but said desks, meeting rooms and phone booths were "more akin to the rental of office space".
- Cinema. The seat is merely the means by which the customer enjoys the film. Founders use this to argue that court or room access is the mechanism for delivering a service.
HMRC's counter-image, used in padel refusals, is that court hire is "more akin to the rental of a football pitch", and that "without this maintenance the space could still be used".
Two examples: a car park and a cinema
A car park would certainly fail; a cinema qualifies. Both let customers use a space, but only the cinema sells a service.
The car park. A driver pays to leave their car in a bay. Nobody is on site, there is nothing to watch, eat or do, and the only costs are the land, some line painting, a barrier and the odd sweep. The customer "is free to use the property for the purpose for which it is intended", which is Tax Bulletin 54's description of leasing. Close to 100% of income is a licence fee (s.192(1)(e)) and close to 100% of capital is the land, so it fails the substantial test on every measure.
The cinema. HMRC's own Tax Bulletin 54 example. The customer occupies a seat, but that is not what they pay for. They pay to watch a film, screened by staff in a heated auditorium with Dolby Atmos sound, cleaned between showings, with popcorn and drinks on sale. The seat is merely the means by which the service is delivered, so the licence is incidental.
| Car park | Cinema | |
|---|---|---|
| What the customer pays for | A space to leave a car | A film and the experience of watching it |
| What they receive beyond the space | Nothing | The film, projection, Dolby Atmos sound, heating, cleaning, concessions |
| Staff | None on site | Projection, front of house, cleaning, concessions |
| Main costs | Land and minimal upkeep | Film hire, staff, equipment, energy, stock |
| Revenue streams | Parking fees only | Tickets, food and drink, advertising, events |
| Where the capital goes | Almost entirely the space | Screens, sound, seating, kitchen, technology |
| Licence fees as a share of the trade | Close to 100% | Incidental |
| Verdict | Excluded activity: fails | Service with an incidental licence: qualifies |
Ask which column your business looks like, on both revenue and costs. A padel club that only rents courts is a car park; one that sells coached, staffed, hospitality-led sessions can argue it is a cinema.
The substantial test
Excluded activity is allowed only if it is not a "substantial part" of the trade. HMRC normally accepts it is not substantial where, "judged by any measure which is reasonable in the circumstances of the case (for instance, by reference to turnover or capital employed), such activities account for no more than 20 percent of the activities of the trade as a whole" (VCM3010).
Three things founders often miss:
- HMRC chooses the measure, not you. "HMRC can use any reasonable measure." Passing on revenue does not help if you fail on capital.
- Capital employed is now used routinely for venues. HMRC's words: "Where the business model is capital-intensive and substantial resources have been invested in constructing the courts, capital employed can be a reliable and reasonable measure."
- It applies throughout period B. Year 1 matters as much as year 3. A forecast where hire income dominates early on will be queried.
Other measures HMRC or founders have used include management time, floor area, staff time and customer usage data. Test yourself against all of them and lead with the strongest honest picture.
Typical HMRC queries
HMRC's leasing and licensing queries follow a set pattern. They restate the law (s.181, s.257DA, s.189, s.192), quote VCM3200 and the 20% test, then ask detailed questions. You normally get about a month; if you don't reply, HMRC "will close your application".
| Area | What HMRC typically asks |
|---|---|
| Revenue | A monthly three-year forecast showing every income stream separately (memberships, bookings, pay and play, coaching, classes, F&B, events, retail, sponsorship), plus all investment expected and current cash |
| Each income stream | "What exactly is the customer paying for and what do they receive?" Fees, durations, and "Are any services provided?" |
| Services and staff | Who delivers coaching, classes and other services: your own employees or third-party contractors? How many staff on site daily, their roles and hours |
| Events | "What is the average revenue expected from a single event? How many events does the company envisage hosting per month?" |
| Food and drink | Who runs the bars and kitchen, whose equipment is used, and copies of any third-party agreements |
| Third parties on site | If others operate from your premises (a pro shop, café), what rent or fees they pay you |
| Property | Site address, lease terms, landlord agreements, service charges, and who maintains the courts or facilities |
| Capital | How the raise will be spent, and how much goes on the asset customers use |
| Evidence for claims | Support for statements in the deck, e.g. that "the licence to use the gym floor is incidental to the coached staffed service" (HMRC: "I was unable to locate any evidence in support of this statement") |
| Expansion | Plans, timing and locations for further sites |
| The narrative | "A detailed narrative on how and why the company believes it meets the trading requirement of not carrying out the excluded activity of leasing/licensing" |
If you prepare these answers before you apply, most of these questions never get asked.
What you need to do 1: the revenue side
Show that what customers pay for is a staffed service, and that any bare hire income is well under 20% in every year.
- Split your forecast by income stream. HMRC will ask anyway, often listing 10–15 streams. Show memberships, coaching, classes, food and drink, events, retail and any bare hire separately, monthly for three years.
- Keep bare hire at or below 20% of revenue from year 1. Court, desk, room or equipment hire with no service attached counts against you. Move it into service bundles only if that genuinely reflects what you sell.
- Make memberships buy services, not access. List what is included: coaching, supervision, classes, community events, maintained facilities, equipment, booking and support. Approved padel clubs showed members' benefits that were off-court services.
- Explain every income line. For each stream state what the customer pays, what they receive, who delivers it (your employees, not contractors) and whose equipment is used. For events give the average revenue per event and how many per month.
- Use consistent language. Words like "rent", "hire", "workspace" or "court rental" in your deck or model invite a query. Describe what you actually do, accurately.
- Confirm VAT treatment. Standard-rated VAT on all income has helped show a service rather than an exempt licence to occupy land.
- Have usage evidence where you can. One approved club showed that only 10% of guests "only come to just play Padel"; the rest used other services.
If third parties run your bar, kitchen or shop, say whether they pay you rent or a licence fee. That income is excluded and counts towards the 20%.
What you need to do 2: the cost side
Show that your money, and the SEIS/EIS money in particular, is spent mainly on delivering services, not on building an asset for others to hire. This is where recent padel and gym applications have failed even with good revenue splits.
- Break down your use of funds by what it builds. Separate the hired asset (courts, desks, pods, saunas) from service delivery (clubhouse, studios, kitchen, coaching staff, equipment used in classes, technology, marketing). If the hired asset takes more than 20% of the raise or of total capital, expect HMRC to apply the capital-employed test.
- Show the cost of delivering the service. VCM3200 looks at "the extent to which the fees relate to the cost of such work". Put staff, coaching, cleaning, maintenance and upkeep costs in the forecast, and show they are significant compared with rent and the asset.
- Staff it with employees. Give headcount, roles, hours on site and staff-to-customer ratios. Outsourcing core services weakens the service argument; HMRC quoted one founder's "not sure what we will outsource" back at them.
- Consider how assets are held. In one sauna case, units were owned by a specialist manufacturer and used under operating leases, "in the same way that a restaurant might lease its commercial espresso machine". Leasing in equipment you use is different from leasing it out.
- Match the deck, the forecast and the application form. HMRC compares all three. A deck showing most of the money going on courts while the form talks about services will be queried.
If your capital is mostly the hired asset, be realistic: restructure the plan (for example, raise SEIS/EIS for the service operation) before applying, rather than arguing after a query.
Before you apply:
Remember: Answers must be accurate and complete. HMRC can disregard an assurance given on incorrect information, so never overstate services or leave out facts such as an extra leased area.
- Forecast split by income stream, monthly, three years; bare hire at or below 20% of revenue in every year
- Use of funds split between the hired asset and service delivery; hired asset at or below 20%
- Service delivery costs (staff, coaching, upkeep) visible and significant
- Membership benefits listed as services
- Staffing plan with employees, roles and hours
- Customer terms and any landlord or supplier agreements ready (drafts are fine)
- Deck, forecast and form use consistent, accurate wording
- VCM3200 and Tax Bulletin 54 read, with your health-club or cinema comparison written down
