Difference Between SEIS and EIS: 10 Common Pitfalls Founders Must Avoid

Understanding the difference between SEIS and EIS is essential, but knowing the rules is only half the battle. In practice, most SEIS and EIS failures happen because founders fall into avoidable compliance traps that only become obvious after investors try to claim tax relief.

SEIS and EIS are powerful tools for raising early stage funding, but they are also tightly regulated. Small mistakes around investor eligibility, share issues, timing, or company age can invalidate relief entirely. That is why many founders choose to apply for SEIS or EIS advance assurance before raising, so HMRC confirms eligibility upfront.

This guide focuses on the 10 most common SEIS and EIS pitfalls that cause HMRC rejections and tax relief clawbacks. By understanding where founders typically go wrong, you can structure your raise correctly, protect your investors, and avoid costly delays.

What is the difference between SEIS and EIS?

SEIS and EIS are both government backed investment schemes, but they target companies at very different stages. Understanding how they differ helps founders choose the right route and avoid structuring mistakes.

SEIS explained

SEIS is designed for very early stage startups raising their first external funding.

• Maximum investment per company: £250,000
• Company age: must have been trading for less than 2 years
• Investor tax relief: up to 50 percent income tax relief
• Individual investor limit: £200,000 per tax year

SEIS is often used before a seed or Series A round to prove traction and attract early supporters.

EIS explained

EIS supports businesses that are further along and ready to scale.

• Maximum investment per company: £12 million, £20 million for knowledge intensive companies
• Company age: generally within 7 years of first commercial sale
• Investor tax relief: up to 30 percent income tax relief
• Individual investor limit: £1 million per tax year, £2 million for knowledge intensive companies

A detailed side by side breakdown is covered in our guide on the difference between SEIS and EIS.

What are the 10 most common SEIS and EIS pitfalls?

1. Are your investors classed as “connected persons”?

One of the most common SEIS and EIS pitfalls is accepting investment from someone HMRC considers connected to the company.

An investor will lose tax relief if they are:

• An employee or paid director
• Entitled to more than 30 percent of shares or voting rights
• A business partner of a director
• A close family member, including spouses, parents, children, grandparents, or grandchildren

This rule catches many friends and family rounds and often comes to light only after shares are issued.

2. Are SEIS and EIS shares issued on the same day?

If you are using both schemes, SEIS shares must be issued before EIS shares, never on the same day.

Issuing SEIS and EIS shares simultaneously is a disqualifying event. HMRC will require you to withdraw from one scheme, which can invalidate investor relief and delay funding.

Correct sequencing is essential when planning a combined SEIS and EIS raise.

3. Were shares issued before the money hit the bank?

Shares must only be issued after the investment funds are received into the company bank account.

Issuing shares before cash is received is a disqualifying investment under both schemes, even if the money arrives later the same day.

This administrative error alone has caused many otherwise eligible rounds to fail.

4. Were the shares paid fully in cash?

SEIS and EIS shares must be paid:

• Wholly in cash
• In full
• At the time of issue

Non-cash consideration, loan conversions, or unpaid amounts will invalidate relief. Even well-intentioned shortcuts during early fundraising can break the rules.

5. Do the shares carry any protection or guarantees?

SEIS and EIS require full-risk ordinary shares.

Shares must not:

• Be redeemable
• Protect investors from loss
• Guarantee returns
• Include preferential rights to assets

Dividend rights must be fixed and non-cumulative. Any side agreement that reduces investor risk can invalidate the entire investment.

HMRC’s guidance on share requirements is set out clearly on GOV.UK.

6. Is the investment genuinely for commercial growth?

HMRC will deny relief if the investment appears to exist mainly for tax avoidance rather than business growth.

Problematic arrangements include:

• Circular investments
• Reciprocal investment agreements
• Artificial structures designed to extract value

Funds must be raised for genuine commercial expansion, not to deliver tax benefits alone.

7. Is your company too old to qualify?

Company age is a frequent point of confusion.

• SEIS companies must have traded for less than 2 years
• EIS companies must generally be within 7 years of their first commercial sale

Misunderstanding when “trading” began is a common reason EIS claims fail. The rules and exceptions are explained in our guide on the EIS investment time limit.

8. Are you submitting SEIS1 or EIS1 too early?

You cannot submit SEIS1 or EIS1 immediately after issuing shares.

HMRC requires that:

• The company has traded for at least 4 months, or
• At least 70 percent of the investment has been spent

Submitting too early causes delays and frustrates investors waiting to claim relief.

9. Does any investor exceed the 30 percent ownership limit?

No investor, together with their associates, can control more than 30 percent of:

• Ordinary share capital
• Issued share capital
• Voting rights

This includes shares already owned before the investment. Breaching this rule removes eligibility for SEIS and EIS relief entirely.

10. Has too much time passed since advance assurance?

SEIS and EIS legislation changes regularly. If there is a long delay between receiving advance assurance and issuing shares, your company may no longer qualify.

Changes in trading activity, ownership, or funding history can invalidate earlier approval. This is why advance assurance should be followed by timely execution.

Applying for SEIS or EIS advance assurance close to your raise helps reduce this risk.

How Sleek helps founders avoid SEIS and EIS pitfalls

SEIS and EIS rules are detailed, technical, and unforgiving. A single mistake can invalidate relief and damage investor trust. Sleek helps founders structure their raise correctly, prepare clear evidence for HMRC, and avoid the most common compliance traps, so funding rounds move forward with confidence.