SEIS Compliance: Pitfalls to Flag for Clients

SEIS compliance work is pattern recognition. The same SEIS compliance defects recur across files, and almost all of them are cheap to prevent at the moment they arise and expensive to repair afterwards. This reference organises the recurring pitfalls by when they strike, so client conversations can happen at the right time rather than the usual one, which is too late.

Before the money: structure and instrument defects

• Convertible loan notes presented as SEIS-ready. They are not, ever. ASAs pass only when genuinely advance subscriptions: short-dated, interest-free, non-refundable, converting into a fixed ordinary class.
• Share classes with quiet preferences: liquidation priority, cumulative dividends or redemption rights offend the ordinary-share tests, however cosmetic they look on the cap table.
• Assurance drift: a raise that no longer matches the assured description, different amount, class or trade, proceeding on the strength of a letter that no longer applies. Reapply or update; do not rely.
• Aggregation misses: family holdings and associates pushing an investor over 30%, or an investor-consultant already functioning as an employee. Screen at term sheet, in writing.

At the issue: timing and evidence

• Funds banked before shares issued, converting subscriptions into arguable loans. Cleared funds, prompt issue, consistent dates on register, minutes and bank statement.
• Tranche sequencing that breaks the £350,000 gross assets test at the second close, the arithmetic in the raise guide.
• SEIS and EIS on ambiguous dates. SEIS first, documented first; same-day mixed issues invite correspondence nobody enjoys.
• No contemporaneous evidence: the asset snapshot, FTE schedule and trade-age proof assembled months later, from memory. The document pack exists to prevent exactly this.

At the SEIS1: the gates and the declarations

Two mechanical gates, four months of trading and 70% of monies employed, and one substantive one: the declarations must be true in fact. The recurring pitfalls are statements filed early and spend analyses that classify optimistically, repayments of founder loans dressed as working capital being the classic. Where spend classification is arguable, resolve it before filing; HMRC queries at this stage delay every investor’s certificate, and the post-round timeline is reputationally live.

Inside the window: the three-year watch

• Value received in its many costumes: loans out, benefits, above-market pay, capital repayments to any shareholder.
• Status events: acquisition, listing, group restructures, or drift toward excluded activity, each capable of unwinding investor relief retrospectively.
• Investor-side changes: connection crossings and employment drift, which clients rarely connect to their tax position until reminded.
• The undiarised anniversary: no system marking when conditions expire, so nobody knows when caution can relax. The full trigger catalogue sits in what breaks SEIS status.

A SEIS compliance calendar that works

Per company file: issue date, the four-month date, the 70% tracker, SEIS1 filed, SEIS2 received, certificates issued, then quarterly three-year-window checks against the trigger list, with the third anniversary closing the file. Per investor client: subscription, certificate, claim, then the same window watched from their side. Two calendars, one discipline, and the pitfalls above become near-impossible to hit.

Two remediation patterns worth knowing

The early SEIS1. Where a statement went in before the gates, the repair is confession and refiling: withdraw or accept rejection, evidence the four-month and 70% positions properly, and refile. The cost is time and investor patience, managed by the communication rhythm in the post-round guide.

The contained value-received. Where value has flowed to one investor, a repaid loan, an off-market purchase, the analysis is per investor, not per company. Quantify it, take advice on whether the de minimis or repayment provisions help, and if relief is lost, contain the damage to the affected holding while documenting that the company-side conditions held for everyone else. What converts either pattern into catastrophe is the same ingredient: months of silence before anyone looks.

Scoping the watch into the engagement

Most compliance failures happen between engagements: the raise was advised, the SEIS1 was filed, and then nobody was retained to watch the window. The fix is contractual: scope a light-touch SEIS condition watch into the engagement letter, the quarterly four-question review, an annual written confirmation, and a standing instruction that exit or restructure conversations reach the adviser before term sheets. Clients rarely decline once shown what clawback costs against what the watch costs; the point is to offer it at the moment of the raise, not after the first accident.

Sources

HMRC Venture Capital Schemes Manual · gov.uk, Apply to use SEIS