Beware these SEIS & EIS Tripwires – Structure, Investors & Risk to Capital

The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are powerful incentives designed to help businesses close funding rounds. Here’s as quick summary of each:

What is the Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a government initiative designed to help start up businesses raise capital by offering tax breaks to investors. It is aimed primarily at established companies that are looking to scale.

EIS features & Benefits

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Investor Income Tax Relief	30% income tax relief on investments up to £1million per tax year (or up to £2million if investing in knowledge intensive companies).
Capital gains tax (CGT) deferral	Investors can defer gains from other assets by reinvesting into EIS shares.
CGT on EIS shares	0% CGT on gains if shares held ≥3 years.
Loss relief	Losses can be offset against income or capital gains.
Inheritance Tax relief	Shares may qualify for 100% relief after 2 years.

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To be eligible, the company must have fewer than 250 employees, less than £15 million in pre-investment assets, and have been trading for less than 7 years (or 10 years for knowledge-intensive companies).[

What is the Seed Enterprise Investment Scheme (EIS)

The Seed Enterprise Investment Scheme (SEIS) is a similar initiative designed to benefit very early-stage start up companies, helping them get off the ground. The risk to investors is higher in this space, so the incentives are more generous than EIS.

SEIS features & Benefits

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Income Tax Relief	Investors can claim 50% income tax relief on the amount invested in SEIS-qualifying shares (up to £200,000 per tax year).
Capital Gains Tax (CGT) Relief	100% exemption from CGT on gains from disposing of SEIS shares, provided the shares are held for at least three years.
CGT Reinvestment Relief	Investors may get up to 50% relief on CGT from other gains reinvested in SEIS-qualifying shares.
Loss Relief	If the investment performs poorly, losses can be offset against income or capital gains, reducing overall tax.

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In simple terms, the SEIS is stricter than EIS and aimed at brand new companies while offering greater tax reliefs. EIS supports larger and more mature start ups with higher investment limits.

Eligibility is limited to early-stage ventures with fewer than 25 staff, less than £350k in assets, and a trading history of under 3 years.[SN3.1]

However, both schemes are high-risk, and eligibility breaches can result in tax relief clawback.

What are the hidden risks of EIS and SEIS?

While tremendously valuable for the right businesses, both the EIS and SEIS initiatives must be handled with care and diligence.

Without the right advice and understanding, it’s easy to inadvertently trip over the complex HMRC rules, potentially costing investors big money and harming your reputation.

Here are the biggest risks to be aware of.

Changing company structure at the wrong time

If you restructure your company, such as through creation of a holding company or changing share classes, too close to an investment round, you could disqualify your shares.

If your company stops being "unquoted" or becomes a subsidiary of another company without following specific rules, the tax relief vanishes.

Agreeing to special investor terms

When trying to secure investment, it’s tempting to give investors everything they ask for. This isn’t always a good idea, because certain “preferential rights” can disqualify shares from SEIS/EIS. These could be guaranteed dividends or specific liquidation preferences.

HMRC states that the shares must be full risk “ordinary” shares.

Spending funds on the “wrong” things

Companies need to use funds raised with the help of SEIS/EIS for specific qualifying business activities that promote growth and development.

To meet the risk-to-capital conditions of the schemes, growth and development of the company should be “permanent and not reliant on continued investor support”. There must also be significant risk to investors’ capital. Using capital for non-qualifying purposes (such as repaying debt or buying other businesses unrelated to trade) could fail this test.

Applying too late for Advance Assurance

Companies may request “advance assurance” before issuing shares. In other words, they can ensure a prospective investment is likely to qualify for SEIS/EIS. This isn’t mandatory but most investors expect it. The bad news is HMRC may decline this assurance before funds are raised, which means applying late can jeopardise the entire investment round.

What could happen if SEIS/EIS rules are broken?

If the SEIS/EIS rules are broken, the results aren’t good. However, they can vary based on which rule is broken and how severe the breach is. Primarily, you can expect:

Investors lose their tax relief: Income tax relief withdrawn, CGT exemptions reversed, and deferred CGT could be immediately payable.
Interest and penalties may be payable to HMRC.
Compliance certificates may become invalid, forcing investors to amend tax returns.
Your funding round may collapse, and future fundraising becomes more difficult.
HMRC may place you under higher scrutiny

Don’t risk undermining your investment round

At Gravitate, we often hear about founders tripping over complex HMRC rules, usually with no deliberate wrongdoing. It’s just a complex web of rules and considerations. HMRC is very particular, and the stakes are high for startups.

That’s where a proactive accountant can really make a difference, focusing on the paperwork, share structures and compliance, while you focus on running your business.

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About the author

Sam Newton

Fellow Member of the Association of Chartered Certified Accountants (ACCA)

Co-Founder & Director

Sam is an award-winning Chartered Accountant and Xero expert. He has built up extensive experience offering Outsource FD support to clients helping businesses scale through collaboration and automation with the end goal of optimising their finances.

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