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FundingUpdated 2026-02-12

What is the 70% spend rule for SEIS?

Quick Answer

At least 70% of SEIS money raised must be spent on qualifying business activity before the company can raise further investment under EIS. This ensures SEIS funds are genuinely used for the qualifying trade, not just parked while seeking larger EIS funding.

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Detailed Explanation

The SEIS 70% spend rule

The 70% spend rule is a condition that links SEIS and EIS fundraising. It prevents companies from raising SEIS money, immediately raising EIS money, and never actually deploying the SEIS funds for their intended purpose.

The rule

If a company has raised money under SEIS and subsequently wants to raise money under EIS, at least 70% of the SEIS funds must have been spent on the company's qualifying business activity. If this condition is not met, the EIS investment will not qualify for tax relief.

What counts as qualifying business activity?

Qualifying business activity includes: - Research and development expenditure - Costs directly related to the qualifying trade (salaries, materials, services) - Preparing to carry on the qualifying trade - Equipment and assets used in the trade

It does not include: - Costs of raising the investment itself (legal fees, broker fees) - General overheads not directly related to the trade - Money returned to shareholders or used for non-trade purposes

When is the test applied?

The 70% test is checked at the time the EIS shares are issued. The company must be able to demonstrate that at least 70% of all SEIS money raised to date has been spent on qualifying business activity by that point.

Example

A company raises £200,000 under SEIS. Before it can raise EIS investment, it must have spent at least £140,000 (70% of £200,000) on qualifying business activity. If it has only spent £100,000, it cannot yet raise qualifying EIS money.

Important considerations

  • The rule applies to total SEIS money raised, not per-round or per-investor
  • Keep detailed records and receipts showing how SEIS funds were spent
  • HMRC will check this when processing EIS compliance statements
  • If the 70% condition is not met, the EIS investors will not be able to claim tax relief, which could create significant issues with your investor relationships
  • There is no time limit for meeting the 70% threshold, but investors will want to see it met before committing EIS money

Practical advice

  • Create a separate spreadsheet tracking how SEIS funds are deployed
  • Categorise each expense as qualifying or non-qualifying
  • Aim to hit the 70% threshold comfortably before beginning EIS fundraising
  • Discuss the timeline with your EIS investors so they understand any delay

Source: HMRC VCM36040 - SEIS Expenditure Condition

Real-World Examples

Software Startup Needing Further Funding

A software company raises £100,000 under SEIS. To qualify for EIS funding later, they must spend at least £70,000 of the SEIS funds on developing their software, marketing, or other qualifying business activities before raising EIS funds.

Restaurant Expansion Plans

A restaurant group raises £50,000 under SEIS to open a new location. Before seeking EIS funding for further expansion, at least £35,000 must be spent on fitting out the new restaurant, hiring staff, or purchasing equipment.

Failed Product Launch

A startup raises £80,000 under SEIS but their initial product launch fails. They pivot and develop a new product. To remain SEIS compliant and eligible for future EIS funding, they must demonstrate that at least £56,000 was spent on the *original* qualifying activity, even if unsuccessful, or demonstrate how the funds contributed to the company's new direction, if deemed a qualifying activity by HMRC.

Common Mistakes to Avoid

  • Assuming that spending on non-qualifying activities, such as acquiring another company (unless it's part of a qualifying trade), counts towards the 70% spend.
  • Failing to properly document how SEIS funds were spent, making it difficult to prove compliance with the 70% rule.
  • Misunderstanding that simply having 70% of SEIS funds 'earmarked' for qualifying activities is sufficient; the money must actually be *spent*.
  • Thinking the 70% spend rule only applies immediately before an EIS round; it's a continuous condition of SEIS investment.

What happens if we don't meet the 70% spend rule?

If you fail to meet the 70% spend rule before an EIS round, the EIS investment could be jeopardized. Furthermore, investors could lose their SEIS tax reliefs, creating significant financial implications. Addressing this non-compliance is critical, potentially by delaying the EIS round until the spending threshold is met.

Can we include directors' salaries as part of the 70% spend?

Yes, but only if the directors are actively involved in the qualifying trade of the business. Their salaries must be reasonable and commensurate with their role in the qualifying activity. Excessive or unjustified salary payments could be challenged by HMRC.

How does HMRC verify compliance with the 70% spend rule?

HMRC typically verifies compliance through detailed reviews of company accounts and supporting documentation. This includes invoices, payroll records, bank statements, and other evidence that demonstrates how SEIS funds were spent. Be prepared to provide comprehensive evidence if requested.

What if we unintentionally underspend due to unforeseen circumstances?

Unforeseen circumstances do not automatically excuse non-compliance. However, it’s crucial to document these circumstances meticulously and demonstrate that the company made every reasonable effort to comply with the 70% rule. Transparency with HMRC is key; they may consider genuine cases of hardship on a case-by-case basis.

Practical Tips

  • Maintain a dedicated spreadsheet or accounting code to track all SEIS funds and their specific use, categorizing expenses to easily demonstrate qualifying activities.
  • Get pre-approval from HMRC before raising EIS funding if you're close to the 70% threshold, or if there's any ambiguity about whether certain expenses qualify.
  • Regularly review your SEIS spend and project future expenditure to ensure you remain on track to meet the 70% rule before your EIS round.
  • Consult with a qualified accountant or tax advisor experienced in SEIS and EIS to ensure full compliance and avoid potential pitfalls.

Related Questions

How much can I raise under SEIS?

A company can raise up to £250,000 in total under SEIS. Individual investors can invest up to £200,000 per tax year across all SEIS investments and receive 50% income tax relief.

How much can I raise under EIS?

A company can raise up to £10 million per year under EIS, with a lifetime maximum of £24 million from all venture capital schemes combined (for shares issued on or after 6 April 2026). Knowledge-intensive companies can raise up to £20 million per year with a £40 million lifetime cap.

What is the difference between SEIS and EIS?

SEIS offers 50% income tax relief on investments up to £200,000 in very early-stage companies (under 3 years, under £250k raised), while EIS offers 30% relief on up to £1 million in slightly larger companies (under 7 years, up to £10 million raised per year).

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