7 Mistakes That Will Disqualify Your Company from SEIS/EIS

Getting SEIS or EIS wrong doesn't just affect your company. It affects your investors. If HMRC determines that qualifying conditions weren't met, your investors lose their tax relief and have to repay it through Self Assessment. That's a fast way to destroy investor relationships and your reputation in the angel community.

The good news: every one of these mistakes is avoidable. This guide covers the 7 most common errors, explains why each is dangerous, and tells you exactly how to protect your company.

Key Takeaways

• Non-qualifying trades are the most fundamental disqualifier -- check the excluded list before you apply
• Never issue shares before getting Advance Assurance -- it's your safety net against all other mistakes
• The 30% connected-person test catches more founders than you'd expect, especially with spouse and family holdings
• The 70% spend rule governs your transition from SEIS to EIS -- miss it and your EIS round fails
• Filing compliance statements late means your investors can't claim their relief
• Most mistakes can be avoided with proper planning and professional advice at the right stage
• Some mistakes can be recovered from if caught early enough

Mistake 1: Not Checking If Your Trade Qualifies

What It Is

SEIS and EIS have a list of excluded trades that don't qualify for the schemes. If your company carries on one of these activities, it cannot offer tax-advantaged shares to investors, regardless of meeting every other condition.

The Excluded Trades

• Dealing in land, commodities, futures, shares, or securities
• Banking, insurance, money-lending, debt factoring, or hire-purchase financing
• Leasing or receiving royalties or licence fees (with limited exceptions)
• Providing legal or accountancy services
• Property development
• Farming, market gardening, forestry, or woodland activities
• Operating or managing hotels, guest houses, or nursing/residential care homes
• Energy generation receiving feed-in tariffs or subsidised rates
• Shipbuilding
• Coal or steel production

Why It's Dangerous

This is a binary disqualifier. If your trade is on the list, there's no workaround, no exception, and no appeal. HMRC will reject your Advance Assurance application, or -- worse -- withdraw relief after shares have been issued if it emerges that the trade doesn't qualify.

Common Grey Areas

The boundary isn't always obvious:

• Software licensing: If your SaaS company licenses software, this could technically involve "receiving licence fees." However, HMRC generally accepts that SaaS businesses are carrying on a qualifying trade of providing software services, not a licensing trade. The distinction matters.
• Property tech: If your company builds software for the property industry, you qualify. If your company develops properties using technology, you probably don't.
• Hospitality tech vs hospitality: Building a booking platform qualifies. Running a hotel doesn't.
• Financial services: Building fintech software qualifies. Operating as a lender doesn't.

How to Avoid It

1. Check the excluded trades list before incorporating (if raising is part of your plan)
2. Describe your trade clearly in your Advance Assurance application
3. If you're anywhere near the boundary, get professional advice
4. Don't assume that because your sector is "tech" you automatically qualify

What If You've Already Made This Mistake

If you've issued shares and your trade turns out to be non-qualifying, there is no fix. Investors will lose their relief. The only path is to be transparent with your investors immediately and restructure the investment on non-SEIS/EIS terms. Do not attempt to recharacterise your trade after the fact -- HMRC looks at the substance of what your company actually does.

Mistake 2: Issuing Shares Before Getting Advance Assurance

What It Is

Advance Assurance is a letter from HMRC confirming that, based on the information you've provided, your company appears to meet the qualifying conditions for SEIS or EIS. It's not legally required -- but issuing shares without it is reckless.

Why It's Dangerous

Without Advance Assurance, you're asking investors to trust that you've correctly assessed dozens of qualifying conditions. If you've got anything wrong -- your trade classification, the connected-person test, the gross assets calculation, the employee count -- your investors discover the problem only after they've invested, when HMRC rejects the compliance statement.

At that point:

• Investors don't get their tax relief
• They may have planned their tax affairs around receiving it
• They're angry
• Your reputation in the angel network is damaged
• You may face legal claims if you represented the investment as SEIS/EIS-qualifying

How to Avoid It

1. Apply for Advance Assurance before you start approaching investors
2. Allow 8 to 10 weeks for HMRC processing (6-8 weeks officially, but add buffer)
3. Don't issue shares until you have the assurance letter in hand
4. Show the letter to prospective investors as part of your pitch

What If You've Already Issued Shares Without Assurance

If shares have been issued, apply for Advance Assurance immediately. If the company does qualify, you can still file the compliance statement and investors can still claim relief. The risk is that you discover a problem after money has changed hands. In that case, consult a specialist tax adviser about your options.

Mistake 3: Breaching the 30% Shareholding Test

What It Is

An investor who holds (or is entitled to hold) more than 30% of the company's share capital, voting rights, or rights to assets/income is a connected person and cannot claim SEIS/EIS income tax relief on their investment.

The 30% test includes shares held by the investor's associates: spouses, civil partners, parents, grandparents, children, grandchildren, and business partners.

Why It's Dangerous

This catches more founders than any other rule. Common scenarios:

• Founder-investor: You own 60% of your company and want to invest an additional £20,000 under SEIS. You can't claim relief because you hold more than 30%.
• Spouse holding: You own 20% and your spouse owns 15%. Together, that's 35%. Neither of you can claim SEIS/EIS income tax relief.
• Angel who takes too much equity: An angel invests and takes a 35% stake. They can't claim income tax relief (though they can claim EIS CGT deferral -- not available for SEIS).
• Option pools: Shares subject to options may count towards the 30% test in certain circumstances.

How to Avoid It

1. Model your cap table before agreeing investment terms. Run the 30% test for every investor, including their associates.
2. Ask investors about associates: specifically, whether a spouse, civil partner, parent, or child holds or will hold shares.
3. Structure your round so that no single investor (plus associates) exceeds 30%.
4. Be careful with convertible notes: if a convertible instrument gives the holder a right to acquire more than 30% on conversion, this could trigger the connected-person test at the point the right arises.

What If You've Already Made This Mistake

The connected person cannot claim income tax relief, but the investment itself is not invalid. The shares are still legitimate. If the investor is claiming EIS (not SEIS), they can still claim CGT deferral relief even as a connected person. The income tax relief is simply unavailable to them.

If you represented to the investor that they would receive SEIS/EIS relief and they can't because of the connected-person test, you may have a legal exposure. Discuss with your solicitor.

Mistake 4: Missing the 70% Spend Rule (SEIS to EIS Transition)

What It Is

Before your company can issue EIS-qualifying shares, at least 70% of any money raised under SEIS must have been spent on qualifying business activity. This means if you raised £250,000 under SEIS, you must have spent at least £175,000 on the trade before EIS shares can be issued.

Why It's Dangerous

If you issue EIS shares before meeting the 70% threshold, those shares do not qualify for EIS relief. Your investors cannot claim their 30% income tax relief. The compliance statement will be rejected by HMRC.

This typically hits companies that:

• Raise SEIS and EIS in quick succession without tracking spend
• Underestimate how long it takes to deploy capital
• Confuse total spend with qualifying spend (not all expenditure counts)

What Counts as Qualifying Spend

• Salaries and wages (including founders' salaries if they're on payroll)
• Product development costs
• Marketing and customer acquisition
• Rent and office costs
• Equipment and software subscriptions
• Professional fees related to the trade (not fundraising fees)

What Doesn't Count

• Costs of raising the investment round (legal fees for the share issue, investor documents)
• Money sitting in a bank account
• Dividends
• Loans to other companies or individuals
• Deposits or prepayments for non-trade purposes

How to Avoid It

1. Track your SEIS spend from day one. Keep a running total of qualifying expenditure.
2. Don't promise EIS investors a timeline you can't guarantee. The 70% threshold depends on your actual spend rate.
3. Get a confirmation from your accountant that the threshold has been met before issuing EIS shares.
4. Include this in your EIS Advance Assurance application. HMRC will want to know that the 70% test has been (or will be) met.

What If You've Already Made This Mistake

If EIS shares were issued before the 70% threshold was met, the shares don't qualify for EIS relief. You may need to restructure. Options include:

• Waiting until the threshold is met, then repurchasing and reissuing the shares (complex, with legal and tax implications)
• Accepting that this round won't carry EIS relief
• Consulting a specialist to explore whether there's a compliant path forward

Mistake 5: Not Filing Compliance Statements on Time

What It Is

After issuing SEIS or EIS shares, you must file a compliance statement (SEIS1 or EIS1) with HMRC. This confirms that the company met all qualifying conditions when the shares were issued. HMRC then issues SEIS3 or EIS3 certificates to your investors, which they need to claim their tax relief.

You cannot file the compliance statement until the company has been trading for at least 4 months after the share issue (or has spent at least 70% of the SEIS money, in the case of SEIS-to-EIS transition).

Why It's Dangerous

There is no hard statutory deadline for filing the compliance statement. However:

• Investors can't claim relief until they have their certificate. If you delay filing, they're waiting. Some investors structure their tax affairs around the expected relief.
• HMRC can take weeks to process. Add your delay to HMRC's processing time and you could be months late.
• Investors lose confidence. If an angel has invested in 10 companies and yours is the only one that hasn't sent the SEIS3 certificate, they notice.
• If the investor's Self Assessment deadline passes, they may need to file an amendment, which is more work and costs money.

How to Avoid It

1. Diarise the 4-month date from the day shares are issued.
2. File the compliance statement on the first day you're eligible. Don't wait.
3. Use HMRC's online service -- it's faster than post.
4. Chase HMRC if you haven't received the certificates within 4 weeks of filing.
5. Send certificates to investors immediately upon receipt.

What If You've Already Made This Mistake

File the compliance statement immediately. There's no penalty for late filing, but the delay is already costing you investor goodwill. Communicate proactively with affected investors, tell them you've filed, and give them an expected timeline for receiving certificates.

Mistake 6: Using Investment Funds for Excluded Purposes

What It Is

SEIS and EIS money must be used for the purposes of the qualifying business activity. If you use the funds for purposes outside the trade, HMRC can withdraw the relief.

Examples of Misuse

• Making loans to directors, employees, or other companies
• Purchasing investments (shares, bonds, property not used in the trade)
• Paying dividends from SEIS/EIS capital
• Funding a non-qualifying trade or activity alongside the qualifying one
• Excessive founder salaries that HMRC considers disproportionate to the work performed
• Related-party transactions at inflated prices

Why It's Dangerous

HMRC doesn't just check at the point of investment. They can enquire at any time within the 3-year holding period (and beyond, in some cases). If they find that a material portion of the investment was used for non-qualifying purposes, they can withdraw relief from all investors, not just the amount misused.

How to Avoid It

1. Keep SEIS/EIS funds in a dedicated bank account (or at least track them separately in your accounts).
2. Document how every significant expenditure relates to the qualifying trade.
3. Don't make directors' loans from SEIS/EIS funds. This is one of the most common triggers for HMRC enquiry.
4. Pay market-rate salaries. If a founder takes a £200,000 salary from a company that just raised £250,000 under SEIS, HMRC will have questions.
5. Avoid related-party transactions unless they're at arm's length and properly documented.

What If You've Already Made This Mistake

Stop the non-qualifying use immediately. If the misuse is minor and you can demonstrate that the overwhelming majority of funds were used for qualifying purposes, you may be able to argue that the conditions are still substantively met. However, this is a grey area. Get specialist tax advice immediately.

Mistake 7: Having Connected Arrangements

What It Is

HMRC can deny relief if the share issue is part of arrangements that are designed to give the investor a guaranteed return or to circumvent the scheme rules. This is a broad anti-avoidance provision.

Examples

• Put options: Giving investors the right to sell their shares back to the company at a guaranteed price. This undermines the "risk" element that SEIS/EIS is designed to address.
• Guaranteed exits: Promising investors that the company will be sold within a certain period at a minimum price.
• Loan-back arrangements: The investor invests £100,000, and the company immediately lends £80,000 back to a company the investor controls.
• Reciprocal arrangements: "I'll invest in your company under SEIS if you invest in mine." HMRC treats these as value-shifting arrangements.
• Pre-arranged purchases: The company agrees to buy goods or services from the investor at inflated prices, effectively returning the investment through the trade.
• Side letters: Any agreement outside the share subscription that guarantees the investor additional benefits.

Why It's Dangerous

The "arrangements" anti-avoidance rule is deliberately wide. HMRC can look at the totality of what happened around the share issue and determine whether the commercial substance matches the form. If they conclude that arrangements exist to circumvent the rules, relief is denied.

This doesn't require fraudulent intent. Companies sometimes enter into innocent-seeming agreements (like offering investors advisory fees, or agreeing to use the investor's other company as a supplier) without realising that HMRC could treat these as connected arrangements.

How to Avoid It

1. Keep the investment clean. The investor buys shares. That's it. No side deals, no guaranteed purchases, no advisory fees.
2. Don't offer put options or any form of guaranteed return.
3. Avoid reciprocal investments where two founders invest in each other's companies.
4. If an investor is also a supplier, ensure the terms are genuinely arm's length and were established independently of the investment.
5. Have your solicitor review any agreements connected to the investment round.

What If You've Already Made This Mistake

The severity depends on the nature of the arrangement. If it's a genuine arm's-length commercial relationship that happens to involve an investor, you may be able to defend it. If it looks like a scheme to circumvent the rules, the relief will be denied.

Consult a specialist tax adviser immediately. In some cases, unwinding the arrangement before HMRC enquires can help, but this needs to be handled carefully.

Recovery Checklist

If you suspect you've made one of these mistakes:

1. Don't panic, but don't delay. The sooner you address it, the more options you have.
2. Stop any ongoing non-compliant activity immediately.
3. Assess the scope: which investors are affected? How much relief is at risk?
4. Consult a specialist: SEIS/EIS tax advice is a niche area. Use an adviser who deals with it regularly, not a generalist accountant.
5. Communicate with investors: if relief is at risk, they need to know. Transparency now is better than a surprise HMRC withdrawal later.
6. Document everything: keep records of what happened, when you discovered the issue, and what steps you took to address it.

How AccountsOS Helps You Stay Compliant

Clean financial records are the foundation of SEIS/EIS compliance. You need to track qualifying expenditure, monitor gross assets, maintain your share register, and document how investment funds are spent.

AccountsOS keeps your books up to date in real time, so you always know where you stand. Ask your AI accountant about your gross assets position, check your qualifying spend percentage, or verify that you're ready to file a compliance statement. Start with our SEIS/EIS eligibility checker to confirm your company qualifies, and use the tax relief calculator to show investors the numbers.

Frequently Asked Questions

Can HMRC withdraw relief years after the shares were issued?

Yes. HMRC can open an enquiry into an investor's SEIS/EIS claim within 12 months of the tax return being filed. However, if they discover that information was inaccurate or conditions were not met, they can raise a discovery assessment for up to 4 years (or 6 years in cases of carelessness, 20 years for fraud). The 3-year holding period is a minimum, not a protection against later enquiry.

What if only one condition is breached? Do all investors lose relief?

It depends on the condition. If the company-level condition is breached (e.g., non-qualifying trade), all investors lose relief. If the breach is investor-specific (e.g., one investor is a connected person), only that investor is affected. Company-level breaches are more serious because they have wider impact.

Are these rules the same for both SEIS and EIS?

Most rules apply to both schemes, but with different thresholds. The qualifying trade list is identical. The connected-person test works the same way. The 70% spend rule is specific to the SEIS-to-EIS transition. The specific limits (gross assets, employee count, company age, investment amounts) differ between the two schemes. See our complete guides to SEIS and EIS for the specific thresholds.

Should I get a specialist adviser or can my regular accountant handle SEIS/EIS?

SEIS/EIS is specialist territory. While any accountant can file a compliance statement, the qualifying conditions, grey areas around trade classification, and anti-avoidance rules require specific expertise. For the Advance Assurance application and initial compliance setup, use an adviser who regularly handles SEIS/EIS. Your regular accountant can maintain the ongoing records.

What's the single most important thing I can do to protect my SEIS/EIS eligibility?

Get Advance Assurance before issuing shares. It catches the vast majority of problems before they become expensive. If HMRC identifies an issue during the Advance Assurance process, you can address it before any investor money is at risk. Without Advance Assurance, you're flying blind.