Avoid These Common SEIS & EIS Mistakes and Secure Your Investment
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are powerful funding tools for early-stage businesses in the UK. These schemes attract investors by offering generous tax reliefs while enabling startups to access vital equity financing. However, mistakes in the application and compliance process can jeopardize eligibility. Understanding these common pitfalls can help businesses and investors navigate SEIS/EIS successfully.
1. Does Your Business Qualify? Common SEIS/EIS Eligibility Mistakes
Eligibility is the foundation of a successful SEIS/EIS application, yet many businesses overlook crucial requirements:
Incorrect Company Structure: Only independent companies qualify. Subsidiaries or businesses controlled by another entity may be ineligible.
Non-Qualifying Trades: Businesses engaged in financial services, property development, and energy production are typically excluded.
How to Avoid: Before applying, review your company’s structure and trade activities to ensure compliance with SEIS/EIS rules or get in touch with our SEIS/EIS advisors today.
2. Failing the "Risk to Capital" Condition
Introduced in 2018, this rule ensures investments are genuinely high-risk and aimed at long-term business growth. If a company focuses solely on delivering guaranteed returns, it may fail this test.
How to Avoid: A well-structured business plan should demonstrate growth potential and highlight investment risks.
3. Missing Critical Deadlines
Timelines are crucial for SEIS/EIS compliance:
SEIS funds must be raised and spent within three years of issuing shares.
EIS funds must be used within two years of investment.
Advance Assurance should be obtained before issuing shares.
How to Avoid: Create a detailed project timeline and ensure all deadlines are tracked.
4. Errors in Advance Assurance Applications
Advance Assurance allows businesses to confirm eligibility with HMRC before raising funds. Incomplete applications often lead to delays or rejections.
How to Avoid: Submit a thorough application including:
A clear business plan.
Financial forecasts.
A breakdown of how the funds will be used.
5. Misusing SEIS/EIS Funds
Both SEIS and EIS funds must be used for qualifying business activities. Using them for ineligible purposes, such as repaying debts, can lead to disqualification.
How to Avoid: Keep detailed financial records and ensure all funds align with the submitted business plan.
6. Issuing Shares Incorrectly
Common mistakes include:
Issuing shares without receiving payment.
Offering preference shares, which do not qualify under SEIS/EIS.
How to Avoid: Issue only fully paid ordinary shares with no preferential rights.
7. Failing to Meet Reporting Requirements
After issuing shares, companies must submit specific forms to HMRC:
Form SEIS1 (for SEIS) and Form EIS1 (for EIS) confirm share issuance and fund usage.
How to Avoid: Submit accurate and timely reports to HMRC to maintain compliance.
8. Investor Eligibility Issues
Investors must meet specific criteria to claim tax relief:
They cannot own more than 30% of the company (including shares held by family members).
They must not receive additional benefits beyond their investment.
How to Avoid: Screen investors before issuing shares to ensure compliance.
9. Losing SEIS/EIS Status Post-Investment
Compliance does not end once funds are raised. Risks include:
Altering the company’s structure within the qualifying period (three years for SEIS/EIS shares).
Using funds for non-qualifying activities.
How to Avoid: Maintain compliance for the entire qualifying period and align business activities with SEIS/EIS rules.
10. Not Seeking Professional Guidance
Navigating SEIS/EIS regulations without expert support can lead to costly mistakes. The complex rules require precise interpretation to ensure eligibility.
How to Avoid: Work with experienced SEIS/EIS advisors to handle applications, compliance, and investor relations effectively.
Final Thoughts: Secure Your SEIS/EIS Success
SEIS and EIS offer incredible opportunities for startups and investors, but avoiding these common mistakes is key to securing funding and tax relief benefits. With careful planning, attention to detail, and professional guidance, businesses can maximise their chances of success.
Need help preparing your SEIS/EIS application? Speak to an expert today.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. SEIS and EIS eligibility, tax reliefs, and compliance requirements are subject to HMRC regulations and may change. Investors and businesses should seek independent professional advice before making any financial or investment decisions.