EIS and SEIS Compliance Check: Advance Assurance and Withdrawn Relief

An EIS or SEIS compliance check is HMRC's review of whether a company genuinely meets the conditions needed for its investors to claim relief under Parts 5 and 5A ITA 2007. This can happen when a company submits its compliance statement after shares are issued, or later if HMRC has reason to believe a condition has ceased to be met during the qualifying period.

Relief can be affected even where advance assurance was previously given, since assurance is based on the plans described at the time and is not binding if the company's actual activities, structure or use of funds differ materially from what was set out in the assurance application.

Advance assurance is HMRC's non-statutory opinion on whether a proposed investment is likely to qualify, based on information the company provides before shares are issued. It gives investors and companies some comfort before fundraising, but it is not a guarantee that relief will ultimately be available.

If the company changes its trade, fails to use funds as described, or the risk-to-capital condition is not genuinely met in practice, HMRC can still refuse the compliance statement or withdraw relief later, regardless of an earlier advance assurance opinion. Companies should keep assurance applications accurate and update HMRC if plans change materially before shares are issued.

The risk-to-capital condition requires that the company has objectives to grow and develop over the long term, and that the investment carries a significant risk of capital loss exceeding the likely net return. It was introduced to prevent capital preservation schemes from using the reliefs, and HMRC scrutinises it closely in sectors where returns can appear low-risk, such as certain asset-backed or contractual arrangements.

A compliance check often focuses on whether the underlying business model genuinely exposes investors to commercial risk, or whether structuring features effectively protect capital in a way inconsistent with the qualifying purpose of the reliefs.

If HMRC concludes that the compliance statement was inaccurate, or that a condition was not met, it can refuse to issue the compliance certificates that allow investors to claim relief, or it can withdraw relief already claimed. This can mean investors face additional tax, since relief previously given against income tax or Capital Gains Tax is clawed back with interest.

A penalty can also apply to the company under Schedule 24 FA 2007 if the compliance statement contained an inaccuracy due to carelessness or a deliberate act. The company's cooperation and the accuracy of information provided during the check can affect how any penalty is assessed.

Where relief is withdrawn, HMRC issues assessments to affected investors to recover the income tax relief given, and any Capital Gains Tax deferral or exemption linked to the investment can also be affected. Investors are often not in a position to control the company's compliance, which makes clear and timely communication from the company important once an issue arises.

Companies should notify investors promptly if a compliance check raises doubts about qualifying status, since investors may need to review their own tax position and consider amending returns before HMRC contacts them directly.

Monitoring the qualifying trade, use of funds and risk-to-capital conditions throughout the relevant period, not just at the point of investment, reduces the risk of an inadvertent breach. Keeping records of board decisions, fund allocation and business activity supports a robust response if HMRC later asks questions.

Where a material change to the business is being considered, for example a shift in trading activity or a significant new funding round, reviewing the potential impact on existing investors' relief before proceeding avoids discovering a problem only once HMRC raises it.