There are three separate sets of conditions, and a company can pass two of them and still fail. The company has to qualify, the shares have to qualify, and each investor has to qualify.
Gate one: the company
Trading for less than three years
Measured from when the company began carrying on its new qualifying trade, not from incorporation. Preparing to trade does not count, so development, research, testing and fundraising all sit before the clock starts.
No previous trade
The company must not have carried on any other trade before beginning the current one. This ends most borderline cases. Pivoting does not reset the clock.
A qualifying trade
Excluded: banking, insurance and financial services, dealing in land or securities, property development, leasing, legal and accountancy services, farming, hotels and nursing homes, and certain subsidised electricity generation. Mixed businesses are tested on whether excluded activities are a substantial part, which HMRC takes as more than 20 per cent.
Gross assets under £350,000
Measured immediately before the share issue. Companies with long development periods often accumulate more here than they expect, particularly where development costs have been capitalised.
Fewer than 25 full time equivalent employees
Directors count. Part time staff are apportioned.
A UK permanent establishment
UK incorporation is not required, but there must be a genuine fixed place of business or an agent here with authority to conclude contracts.
Not controlled by another company
This rules out UK subsidiaries of overseas parents, including the standard Delaware topco structure.
£250,000 lifetime limit, including de minimis state aid
SEIS is itself de minimis state aid, and so are a number of grants. Any de minimis funding already received counts against the ceiling.
No EIS or VCT money already taken
A company cannot receive SEIS investment after issuing EIS or VCT shares. The order is one way.
Gate two: the shares
- New ordinary shares, not a transfer of existing shares from another holder
- Subscribed for in cash and fully paid at issue, not for services, assets or in settlement of a debt
- Full risk, with no preferential dividend, liquidation preference or redemption rights
- Issued before any EIS shares, and not on the same day
- Money used within three years for the purposes of the qualifying trade
Preference is usually created by accident
The trap is inadvertent preference, generally introduced when a new class with lesser rights is created. Deferred shares are the common culprit: adding a class that ranks below the ordinary shares can elevate those ordinary shares into a preferential position without anyone intending it.
Gate three: each investor
- Not more than 30 per cent of ordinary share capital, voting rights or rights to assets on a winding up, counting associates
- Not an employee. Directors can claim, which is a genuine difference from EIS
- An individual paying UK income tax. Companies cannot claim SEIS relief
- Shares held for three years, running from issue or from the date trading began if later
And across all of it: risk to capital
This is now among the most common reasons an application is refused. Two limbs have to be satisfied. The company must be raising the money to grow and develop its trade over the long term, and there must be a genuine risk that the investor loses more capital than they gain in relief.
HMRC applies this as a purpose test looking at everything together: how the funds will be used, whether income is contracted or otherwise secured, whether assets underpin the investment, and whether the structure looks designed to protect the investor's downside. Being a qualifying trade is not enough on its own.
If you fail on one point
SEIS gone, EIS available
EIS runs seven years from first commercial sale with far higher thresholds. Relief drops from 50 to 30 per cent rather than disappearing.
Fixable, but only beforehand
Usually straightforward to correct before shares are issued and not afterwards. This is the strongest argument for having the articles reviewed early.
That is simply the position
Attempts to engineer around it through family holdings fail on the associate rules.
The practical order to check them
Trading date first, because it is quick and settles most cases. Then previous trade, then the excluded activities list. Then gross assets and headcount. Then the articles. Then each investor individually.
Most companies that fail do so on one of the first three, and most that fail on the articles could have avoided it.
Want a straight answer on where you sit?
- You are not sure which conditions your company already fails
- Your trade sits near one of the excluded categories
- You have taken grant funding and do not know your remaining headroom
- Nobody has reviewed your articles against the schemes
Most of this can be settled in a single conversation, and it is considerably cheaper to settle before shares are issued.
Book a call →30 minutes, no charge, no pitch
This article sets out the general position and is not advice on any particular set of facts. Thresholds and rates are those applying at the date of publication.