SEIS/EIS Compliance Mistakes After Funding (and How to Fix Them)

Introduction

After a company raises investment under the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS), founders often breathe a sigh of relief. Yet the hard work is not over. In reality, strict compliance rules begin as soon as the funds are received. HMRC expects companies to follow a three‑year monitoring period, maintain qualifying conditions and file regular reports; failing to do so can lead to SEIS/EIS non‑compliance and leave investors facing a clawback of tax relief. 

Understanding these obligations is crucial for founders, CFOs and legal teams. Compliance lapses, such as issuing the wrong share class or misusing funds, are common. HMRC rules can be complex, and mistakes made post‑funding may only surface years later when relief is challenged. 

This article explains the ten most frequent SEIS compliance mistakes and EIS reporting issues, backed by official guidance and real-world examples. For each issue, we show what went wrong, outline the legal consequences, and provide practical steps to fix it. Whether you’re new to SEIS/EIS or seeking to reinforce your processes, this deep dive will help you protect your investors and your business.

What SEIS/EIS Compliance Means After Funding?

After funding closes, SEIS/EIS compliance shifts from eligibility to ongoing obligations that HMRC actively monitors.

The 3‑Year Compliance Period

After shares are issued under SEIS or EIS, HMRC imposes a monitoring period of three years (known as “period B” for EIS) during which the company must meet qualifying conditions. The shares must remain in issue and not be redeemed or repurchased, and the company must continue to carry on a qualifying trade. If a disqualifying event occurs within this window, such as disposing of shares, granting investors preferential rights or ceasing to trade, HMRC will withdraw tax relief for investors.

HMRC Monitoring of Qualifying Conditions

HMRC monitors compliance using the risk‑to‑capital condition and other rules to ensure that investments are genuinely at risk and used for growth. According to the HMRC manual, the company must have objectives to grow and develop in the long term; the investment must carry significant risk, and there should be a possibility that investors lose more capital than they stand to gain. HMRC may examine whether funds are being spent on qualifying activities within the required timeline (three years for SEIS, two years for EIS) and may review confirmation statements and filings to ensure no disqualifying changes were made.

Why Post‑Funding Obligations Matter for Investors?

SEIS and EIS are attractive because they offer generous tax incentives. Investors can claim income tax relief of 50% under SEIS and 30% under EIS, defer or exempt capital gains, and access relief on losses. However, these benefits are conditional on compliance. If HMRC determines that the company or investors breached the rules by providing prohibited benefits, issuing improper share classes or failing to submit the SEIS1/EIS1 compliance statement on time, relief can be withdrawn or reduced. In extreme cases, HMRC may open investigations, levy penalties and require repayment of previously claimed tax relief. Ensuring HMRC SEIS/EIS compliance protects both investors and the company’s reputation.

Learn more about preparing for investment in our guide on how to apply for SEIS/EIS advance assurance.

Common SEIS/EIS Compliance Mistakes (with HMRC Examples)

The following ten mistakes illustrate the pitfalls that often trip up founders during the post‑investment period. Each mistake is accompanied by the consequences and practical fixes.

Summary Table: Mistakes, Consequences and Fixes

Grey Areas and Mixed Trades

Some sectors do not fit neatly into the allowed or excluded categories. To navigate these mixed trades SEIS/EIS situations, you must analyse the primary revenue stream, the level of control and the percentage of turnover attributable to each activity. The following grey zones often cause confusion.

Platforms vs Financial Intermediaries

An online marketplace that brings buyers and sellers together typically qualifies. The key is that the platform does not take ownership of goods or hold client money. For instance, a peer‑to‑peer marketplace that collects a commission on each sale may qualify as a SEIS qualifying trade. In contrast, a company providing loans or investment products directly to customers is engaged in banking or financial services and is therefore an EIS excluded activity.

Software with Regulated Financial Functionality

Fintech startups may build software for payments, budgeting or investment analytics. If the firm simply sells software subscriptions and does not handle deposits or credit, it typically qualifies. However, if the business holds client funds, invests them or provides regulated advice, it may cross into excluded territory. The difference often depends on whether the business is authorised by the PRA for deposit‑taking or by the FCA only.

Hospitality Models

Bars and restaurants are qualifying trades because they supply food and beverages. But when the business provides overnight accommodation, it is considered a hotel or guest house and therefore excluded. Pop‑up accommodation or glamping sites can fall into a grey area; HMRC may consider factors such as marketing, occupancy rates and services offered.

Real‑Estate Tech vs Property Development

A prop‑tech company that offers software for managing properties or advertising rentals is usually allowed. The problem arises when the company also acquires and develops properties for sale or rent; this property development element is excluded. To qualify, ensure that any development activity is insignificant compared with the core tech business.

Car Rental vs Leasing

Car‑sharing platforms that facilitate bookings without owning the vehicles may qualify. Conversely, businesses that purchase cars and rent them out are engaged in leasing, which is excluded.

Renewable Energy vs Energy Generation

Manufacturing or installing renewable energy equipment may qualify, but operating the energy plant and selling electricity is excluded. For example, a company designing battery storage technology is a qualifying trade, while running a solar farm is not.

Understanding these distinctions is essential. When describing your business to HMRC, be clear about what you do and how revenues are generated. Evidence such as contractual terms, invoices and marketing material can demonstrate that excluded activities are minimal.

How HMRC Evaluates a Startup with Multiple Activities?

Companies often engage in multiple activities. HMRC will test whether any excluded activity is substantial. Key factors include:

Primary Revenue Source

HMRC examines where the bulk of turnover and profits arises. If 80 % of revenues come from a qualifying trade and 20% from an excluded activity, the latter may be considered “insignificant”. Clear evidence of revenue sources, such as accounts, forecasts and customer contracts, helps prove your case.

Allocation by Percentage of Trade Activity

The 20% rule is a general guideline. HMRC may look at metrics beyond turnover, including asset allocation, time spent by staff and marketing focus. If the non‑qualifying part uses most of the assets or staff time, HMRC could consider it substantial even if it produces less revenue.

Non‑Qualifying Activities Must be “Insignificant”

The law does not define “insignificant,” but HMRC guidance suggests that if an excluded activity accounts for no more than one‑fifth of the business by any relevant measure, it is likely to be acceptable. Document this analysis in your advance assurance application.

Common Mistakes Startups Make When Assessing Qualifying Trades

Many founders fall foul of SEIS/EIS rules not because their business is fundamentally disqualified, but because of avoidable mistakes:

Misunderstanding Regulated Activities

Founders sometimes assume that because they operate a marketplace or provide a software tool, they will qualify automatically. If the platform facilitates credit, holds client funds or deals in securities, it may be deemed a financial service. Always verify regulatory status and explain it clearly to HMRC.

Describing the Business Model Incorrectly

In advance assurance applications, vague descriptions like “we are an investment platform” can raise red flags. Provide clear details about the goods or services sold, the revenue model and how money flows. For example, emphasise that payments pass directly between buyers and sellers via third‑party processors rather than through your company account.

Overlapping Activities (e.g., advisory + SaaS)

Some startups offer both software and professional services. If the professional service is legal, accountancy or regulated financial advice, it is excluded. Structure the business so that the service element is minimal and separate from the main SaaS product. Consider spinning out advisory arms into distinct companies.

Failure to Provide Revenue Model Evidence

HMRC wants to see that your business aims for profit. Pre‑revenue companies must show credible forecasts, a pricing strategy and market analysis. Without this, HMRC may view the trade as speculative or investment‑like and decline the application.

Not Addressing Risk to Capital Properly

Some founders assume that risk to capital is self‑evident. You must explicitly show how investor capital is exposed: e.g., explain product‑development risks, competitive threats, capital requirements and market uncertainties. Avoid structures that guarantee returns or provide liquidation preferences that shield investors from loss.

For more tips on avoiding common pitfalls, see the top 10 mistakes startups make when applying for SEIS/EIS.

How to Confirm Your Trade for SEIS/EIS (Advance Assurance Approach)?

Advance assurance is the process of asking HMRC to confirm that your investment scheme meets the conditions for SEIS/EIS. It is not mandatory, but it is highly recommended because it signals credibility to investors. Here’s how to prepare:

Preparing a Clear Business Description

Begin by drafting a concise description of your business that emphasises its commercial goals, the goods or services sold and the intended use of funds. Explain how the trade will develop, including key milestones and growth plans. Avoid jargon and highlight that the company is a SEIS qualifying trade with no substantial excluded activity.

Demonstrating Qualifying Activity in Documentation

Prepare a business plan showing revenue models, customer acquisition strategies, competitive advantages and IP assets. Include evidence that any non‑qualifying activities are insignificant. For example, if you run an e‑commerce platform and provide optional extended warranties via a third party, show that warranty commissions are less than 5 % of turnover.

Providing Financial Forecasts for HMRC

Even early‑stage companies need credible forecasts. Build a financial model projecting revenues, costs and profits over three to five years. Ensure that assumptions are realistic and consistent with market data. HMRC will cross‑check that the numbers reflect a commercial, profit‑driven trade.

Addressing Excluded Activities in Advance Assurance

If your business touches on grey areas, such as energy, property or finance, include a clear explanation of why these activities are ancillary. Provide contracts or letters from suppliers to prove that your company does not generate energy or own property. If necessary, restructure operations to segregate excluded activities into a separate entity not seeking SEIS/EIS.

For a full guide, read how to apply for SEIS/EIS advance assurance.

Next Steps

Understanding SEIS/EIS qualifying trades and EIS excluded activities is vital for any founder or investor planning to use these schemes. HMRC’s rules aim to ensure that tax relief supports entrepreneurial ventures, not passive investments or low‑risk projects. As we’ve shown, most technology, creative, manufacturing and R&D‑driven companies will meet SEIS/EIS trade requirements, provided they avoid substantial excluded activities like property development, financial services or energy generation.

By using Undo Capital, founders save time and reduce the risk of errors. The service does not provide tax advice but ensures that documentation is consistent with HMRC requirements.

‍

Mistake #1 – Issuing the Wrong Type of Shares

Ordinary Shares Requirement. SEIS and EIS require that the shares issued are full‑risk ordinary shares that carry no preferential rights and are not redeemable. The official guidance explains that shares must be fully paid up in cash, not redeemable and not carry any rights to a future fixed return. If a company issues preference shares or shares with redemption rights, HMRC will deem the issue non‑qualifying, and investors lose the tax relief.

In practice, startups sometimes issue share classes with preferential dividends or redemption rights to attract investors. However, HMRC has been clear that improper share classes jeopardise relief. Even convertible loan notes can be problematic if they give rights that differ from ordinary shares. Another common error is issuing SEIS and EIS shares on the same day. Under the “share issuer must have received funds before issue” rule, a company cannot issue EIS shares until the SEIS shares have been issued and at least one day has passed.

How to Fix:

If the wrong share type was issued, the company must rectify the capital structure. Options include:

1. Reverse the share allotment: Cancel the non‑qualifying shares and refund the subscription if possible. The investors can then resubscribe for the correct ordinary shares.
2. Re‑issue compliant shares: Issue new ordinary shares that meet SEIS/EIS requirements (fully paid, voting rights, no preferences). Update the company’s register and cap table accordingly.
3. Update Companies House filings: File corrected SH01 forms within one month of the new allotment and update the confirmation statement to reflect the share class change.

Adopting digital cap table software can help avoid SEIS/EIS cap table errors, ensuring the share class and rights are clearly documented and consistent with statutory filings.

Mistake #2 – Incorrect or Late Companies House Filings

SH01 is missing or incorrect. When new shares are allotted, the company must file Form SH01 with Companies House within 30 days. Failure to do so can result in late filing penalties or prosecution. Mistakes often occur when the allotment details (share number, nominal value, premium) are wrong or omitted, leading to mismatches between the cap table and the public register.

Not updating confirmation statements. The confirmation statement (CS01) must be filed annually (within 14 days of the review period) and should contain up‑to‑date information on share capital and shareholders. If changes such as SEIS/EIS share issues are not recorded, HMRC may question the accuracy of the compliance statement, and Companies House can strike off the company for failing to deliver confirmation statements.

How to Fix:

To address filing mistakes:

• File corrections promptly: If a SH01 or CS01 has errors, submit a replacement form as soon as the mistake is discovered. Companies House accepts replacement filings to amend errors. Late SH01 filings can still be accepted, but may attract penalties.
• Align with cap table: Ensure the cap table reflects the correct number of shares issued and that each allotment is recorded in the statutory register. Tools like Undo Capital provide automated synchronisation between the cap table and filings, reducing the risk of mismatches.
• Use digital reminders: Set up reminders to file confirmation statements on time. Automation helps track deadlines and alerts the compliance team when filings are due.

For more guidance on managing shareholder records, see our article on how to manage your cap table during SEIS/EIS rounds.

Mistake #3 – Providing “Value” to Investors (Prohibited Benefits)

What counts as value: One lesser‑known pitfall is giving investors any form of value after they have subscribed for shares. HMRC lists several examples: paying the investor for consultancy services, allowing them to buy assets at a discount, repaying debts incurred before the share subscription, or waiving liabilities. Even providing loans that are not repaid before the share issue counts as value. Receiving value within three years of the share issue triggers a withdrawal or reduction of relief, because the investor is deemed to have received a benefit beyond the investment.

How to Fix:

If investors have received value, the company should:

1. Disclose the benefit to HMRC: The investor or the company must inform HMRC of the value received within 60 days. Early disclosure can reduce penalties.
2. Stop providing value: Cease any arrangements that provide value, such as consultancy fees or discounted services. Ensure any future transactions with investors are at market rates and not contingent on their shareholding.
3. Adjust investment terms: If the value is significant, the company might need to renegotiate the share subscription or repay the benefit to restore compliance.

Understanding what constitutes SEIS/EIS investor value received is critical. Many startups inadvertently pay investors or their associates for services without realising this breaches the rules. Clear internal policies and training can prevent these errors.

Mistake #4 – Misuse of SEIS/EIS Funds

HMRC rules for the use of funds. HMRC requires that funds raised under SEIS/EIS must be used to grow and develop the business. The funds cannot be used to acquire another company or trade, repay loans or buy real estate.SEIS funds must be spent within three years and EIS funds within two years on qualifying activities such as research and development or preparing to trade.

Fixes:

Misuse can occur when founders are unaware of the restrictions or treat the funds as general working capital. To correct misuse:

• Reclassify expenses: Determine which expenditures were non‑qualifying and allocate them to other revenue streams. Document the reclassification with supporting evidence. If the funds were used to repay a loan, repay the investor or borrow equivalent funds from another source, so that SEIS/EIS money is reserved for qualifying use.
• Demonstrate commercial purpose: If funds were used for an acquisition or asset purchase, prepare a business plan showing how the transaction contributes to the company’s growth. HMRC may accept the expenditure if it can be justified as part of the qualifying trade.
  
  
• Implement controls: Use ring‑fenced bank accounts to ensure SEIS/EIS funds are tracked separately. With Undo Capital, companies can tag expenses to confirm they align with SEIS/EIS use of funds rules.

Mistake #5 – Investor Connectedness Issues

When investors become “connected” post‑funding, an investor is connected to the company if they, together with their associates, control more than 30% of the company’s ordinary share capital or voting power. Additionally, being appointed as a director within the first two years may create a connection, unless the person is a business angel who was not previously connected and receives only reasonable remuneration. If an investor becomes connected, they are no longer eligible for relief.

Disqualifying events. Disqualifying events include investors acquiring additional shares that take them over the 30% threshold, being granted options or loans that increase their control, or the company issuing additional preference shares that reduce other investors’ rights. Such events must be reported to HMRC within 60 days.

How to Fix or Mitigate:

• Monitor shareholdings: Regularly review shareholder percentages to ensure no single investor crosses the 30% threshold. Use a digital cap table to track share issues and transfers.
• Limit board appointments: Avoid appointing investors as directors or employees during the three‑year period unless they qualify under the business angel rule and are remunerated fairly.
• Inform HMRC: If a disqualifying event occurs, notify HMRC promptly and seek guidance. In some cases, investors can sell shares or resign from directorships to restore eligibility.

Mistake #6 – Cap Table Inconsistencies and Errors

Mismatches between legal documents and the cap table. A cap table is a record of who owns what. Errors often arise when founders update spreadsheets manually without reconciling them with legal documents. Mistakes include misrecording the number of shares, ignoring option pools, or failing to update share transfers. Vestd’s guide notes that poor documentation, dead equity and a zoo of micro‑investors complicate ownership tracking. Manual spreadsheets are prone to rounding errors and mis‑calculations, leading to SEIS/EIS cap table errors.

Incorrect share allotment. Another problem is allotting shares before funds have been received, which is prohibited under SEIS/EIS rules. Issuing shares too early can make the issue non‑compliant and create discrepancies in both the cap table and statutory filings. Not recording option grants or warrant conversions can also misstate the company’s total equity.

Fix:

To ensure accuracy:

• Use digital cap table software: Digital platforms, such as Undo Capital, provide a single source of truth, automatically update shareholdings after new issues or transfers and generate SH01 forms. Digital systems reduce human error and ensure the cap table aligns with legal documents.
• Review share certificates: Cross‑check share certificates against the cap table and Companies House filings. Amend any discrepancies immediately.
• Implement approval processes: Require dual sign‑off for share issuances to ensure funds have been received and that the issue complies with SEIS/EIS requirements.

Mistake #7 – Late Submission of Compliance Statements (SEIS1/EIS1)

Understanding deadlines. After raising SEIS/EIS funds, the company must submit a compliance statement (SEIS1 or EIS1) to HMRC. For SEIS, the company must have either been carrying on the qualifying business for at least four months or have spent 70% of the money before filing. For EIS, the company must have started trading and carried on the qualifying business for four months before filing. The form must be submitted within two years from the end of the tax year in which the shares were issued or from the four‑month trading milestone.

What happens if it is submitted late? If the compliance statement is late, investors cannot claim their relief until HMRC has processed the form. In extreme cases, if the form is filed after the two‑year deadline, HMRC may refuse to issue compliance certificates, and investors lose eligibility. Filing too early is also problematic; the company must not submit the form before meeting the trading or spending thresholds.

How to Fix:

• File at the right time: Wait until four months of qualifying trading or 70% of SEIS funds have been spent. Submit the compliance statement promptly but not too early. Track the two‑year deadline to ensure timely submission.
• Re‑apply if required: If a form was rejected due to early submission, re‑apply once the company meets the conditions. Provide updated evidence of trading activity or expenditure.
• Monitor via software: Use compliance tools to remind you of deadlines and generate SEIS1/EIS1 forms correctly. Undo Capital automates the filing process, helping you avoid SEIS/EIS reporting failures.

Mistake #8 – Breaching the Risk‑to‑Capital Condition

Indicators of non‑compliance. The risk‑to‑capital condition ensures that investors are genuinely at risk and that the company intends to grow and develop over time. HMRC guidance notes that companies must show they have long‑term growth objectives and that the capital is at significant risk. Indicators of non‑compliance include structures that guarantee a return to investors, repay capital early or provide fixed dividends. HMRC will also look at the business plan to see whether the company aims to build a sustainable business or simply to deliver a tax‑efficient return.

Fix: Updated Business Plan, HMRC Clarification

• Update business plan: Revise your plan to demonstrate that funds will be used for growth, such as hiring staff, expanding production or developing products. Avoid using funds for low‑risk investments or capital repayments.
• Seek pre‑approval: If uncertain, request HMRC’s opinion on whether a proposed structure satisfies the risk‑to‑capital condition. Advance assurance can provide guidance before the investment is made.
• Avoid guaranteed returns: Remove any provisions (such as redemption rights or minimum dividends) that could be perceived as guaranteed returns. Ensure investors understand that their capital is at risk and returns are not assured.

Mistake #9 – Structural Changes That Break Eligibility

Examples of disqualifying structural changes:

HMRC outlines a range of disqualifying events that can occur during the three‑year monitoring period. These include the company acquiring a 50% interest in another company, the company itself being sold, issuing new shares with preferential rights or merging with a non‑qualifying company. For investors, disposal of shares, becoming connected through additional share purchases or taking up employment with the company are disqualifying events.

How to Fix

• Notify HMRC: If a structural change occurs, inform HMRC within 60 days. Early disclosure allows HMRC to assess whether relief is affected and may reduce penalties.
• Provide updated documents: Submit revised share capital tables, merger agreements or purchase documents to demonstrate the impact of the change.
• Reapply for compliance: If a disqualifying event ends relief, companies can sometimes re‑issue shares and apply for SEIS/EIS again once they meet the qualifying conditions. However, investors may need to reinvest new funds to regain relief.

Mistake #10 – Not Keeping Documentary Evidence

What documentation does HMRC require? HMRC may request evidence to confirm that the company satisfied all SEIS/EIS conditions. Documentation includes board minutes approving share issues, share certificates, subscription agreements, SH01 filings, confirmation statements, proof of trading activity and invoices showing how funds were used. Without proper records, the company may struggle to prove compliance, and HMRC can withdraw relief during audits.

How to Fix:

• Prepare a compliance archive: Create a digital folder containing all documents related to SEIS/EIS share issues and investments. Ensure that each allotment is backed by a subscription agreement, share certificate and board approval.
• Use Undo Capital for secure document storage: Undo Capital’s platform logs corporate actions, stores evidence and produces audit trails. Having a single source of truth simplifies responses to HMRC enquiries and reduces the risk of SEIS/EIS documentation problems.

How to Fix SEIS/EIS Non‑Compliance: Action Plan

If a company discovers a compliance error, the following steps can help rectify the issue and protect investors’ interests:

Step 1: Identify the Issue

Conduct a thorough review of share classes, filings, use of funds and investor relationships. Use compliance software to flag anomalies such as SEIS/EIS monitoring period breaches or SEIS/EIS holding period breach events. Capture details of the error and the dates involved.

Step 2: Assess Investor Impact

Determine which investors are affected and how the mistake affects their relief. For example, if shares were issued incorrectly, identify investors who subscribed to the wrong share class. If funds were misused, calculate the amount that should have been spent on qualifying activities.

Step 3: Contact HMRC (When Necessary)

Where rules were breached, contact HMRC to disclose the mistake. Provide details of the error, the corrective actions taken and any impact on investors. Prompt disclosure may mitigate penalties and show good faith.

Step 4: Correct Filings

Submit replacement SH01 forms, updated confirmation statements or corrected compliance statements as needed. Ensure that the cap table and statutory filings reflect the corrected position. If shares must be cancelled and reissued, handle this through a board resolution and notify investors.

Step 5: Implement Ongoing Monitoring

Prevent future issues by adopting structured monitoring:

• Regular reviews: Schedule quarterly reviews of shareholdings, investor relationships and use of funds. Verify that no disqualifying events have occurred.
• Automation tools: Use a platform like Undo Capital to automate SH01 filings, track SEIS/EIS monitoring period dates, manage cap tables and store documentation. Automated reminders reduce the risk of missing deadlines or misreporting.
• Education: Train staff and directors on SEIS/EIS rules. Provide checklists to ensure any new investment or transaction is assessed for compliance.

Conclusion

Proper SEIS/EIS compliance is more than a bureaucratic exercise; it protects investors’ tax relief and underpins trust in your company. As this guide has shown, the most common mistakes include issuing the wrong share type, late or inaccurate filings, providing value to investors, misusing funds, creating connected investors, cap table inconsistencies, late compliance statements, breaching the risk‑to‑capital condition, making structural changes and failing to keep records. Each carries the risk of SEIS/EIS non‑compliance, with consequences ranging from administrative penalties to complete loss of relief.

Undo Capital offers tools for cap table management, automated filings, document storage and compliance monitoring. These features give founders peace of mind and free time to build their business rather than worry about paperwork.

Visit Undo Capital to explore how our platform can help you automate compliance tasks, maintain accurate records and stay ahead of deadlines. By acting today, you safeguard your investors’ tax relief and ensure that your company remains in good standing with HMRC.

‍