The use of funds test is the SEIS/EIS rule requiring companies to spend investment money on qualifying growth activities within HMRC’s specified timeframe. It ensures that capital raised under these schemes is used to build and scale the business, rather than for non-qualifying or low-risk purposes.
This requirement is central to both SEIS and EIS, reinforcing their purpose: to support genuine early-stage growth. Companies must not only raise funds in a compliant way but also deploy them correctly after the investment.
For founders and investors, meeting the use of funds test is essential to maintaining tax relief eligibility.
Use of funds test (SEIS/EIS) meaning
The meaning of the use of funds test centres on purposeful, compliant and growth-focused capital deployment. It ensures that investment is directed toward activities that contribute to the company’s development.
To define the use of funds test in practical terms, it typically involves:
- Spending on qualifying activities: such as product development, hiring, marketing, research and scaling operations
- Exclusion of non-qualifying uses: funds cannot be used to acquire shares, repay existing loans or provide investor guarantees
- Time-bound requirement: capital must be deployed within HMRC’s timeframe, usually within two years
- Alignment with business growth: expenditure must support expansion and commercial progress
- Ongoing compliance monitoring: Companies must ensure funds continue to be used appropriately
A clear use of funds test definition highlights that both how and when capital is used are critical.
Why the use of funds test matters
The use of the funds test is fundamental to the integrity of SEIS and EIS, ensuring that tax relief supports real economic activity.
Its importance includes:
- Protecting investor tax relief: misuse of funds can invalidate eligibility
- Ensuring compliance with HMRC rules: companies must follow strict guidelines on capital deployment
- Supporting genuine growth: directing funds toward activities that build and scale the business
- Maintaining investor confidence: proper use of capital reassures investors and stakeholders
- Avoiding regulatory risk: incorrect use can lead to penalties or withdrawal of relief
For founders, careful planning and tracking of expenditure is essential to avoid unintended consequences.
How the use of funds test works in practice
In a typical SEIS or EIS round, a company raises capital by issuing qualifying shares. After receiving the funds, it must deploy them into eligible business activities.
For example, a startup may use the investment to develop its product, hire key team members or expand its market presence. These uses align with HMRC’s expectations of growth-focused spending.
However, if the company uses the funds to repay debts, invest in other companies or provide guaranteed returns to investors, it may fail the test.
Timing is also critical. HMRC expects funds to be used within a defined period, and delays can raise compliance issues. Companies must therefore track how funds are spent and ensure they remain within permitted categories.
Where Undo Capital fits in SEIS/EIS compliance
For founders navigating SEIS and EIS requirements, Undo Capital provides practical guidance on structuring and managing the use of funds effectively.
Rather than addressing compliance after the fact, Undo Capital helps align fundraising strategy, budgeting and operational planning with HMRC expectations from the outset. This reduces risk and ensures that capital deployment supports both growth and eligibility.
By integrating compliance into financial planning, founders can maximise the benefits of SEIS/EIS while building a scalable business.
FAQs
What is the use of the funds test?
It is a rule requiring SEIS/EIS investment to be used for qualifying business growth activities.
What are qualifying uses of funds?
Activities such as product development, hiring, marketing and scaling operations.
What happens if funds are misused?
Investor tax relief may be withdrawn if the company fails to comply.
Is there a deadline for using the funds?
Yes, funds typically must be deployed within a specified timeframe, often around two years.
Disclosure Notice: This communication is issued by Undo Capital Limited (“Undo Capital”) and is provided strictly for informational purposes only. It contains general information and should not be relied upon as accounting, business, financial, investment, legal, tax, or other professional advice. Undo Capital is not regulated by the Financial Conduct Authority (FCA) and does not provide investment, financial, or tax advice. Our services are designed to assist startups and businesses with company formation, legal agreements, and funding-related documentation. Nothing in this communication constitutes, or should be construed as, a recommendation, offer, or solicitation to purchase or sell any security or financial instrument.
Participation in startups and early-stage enterprises involves significant risk. Such investments may be illiquid, may not generate dividends, may be subject to dilution, and may result in the total loss of invested capital. Any decisions or actions that may affect your business or personal interests should be taken only after seeking advice from suitably qualified professional advisors, and should form part of a balanced and diversified portfolio. This communication may contain links to third-party websites. The inclusion of such links does not imply endorsement, approval, investigation, or verification by Undo Capital. We accept no responsibility or liability for the content, accuracy, or use of information contained on any third-party websites.
