Section II of 8
Test 2: Use of proceeds and the qualifying purpose
Test two · high leverage. Whether the money raised will be used for the growth and development of the qualifying trade, within the time limits the schemes specify.
What the test is for
SEIS and EIS funds carry a use restriction: they must be spent on the qualifying trade (or on preparing to carry on the qualifying trade, or on R&D leading to it), and they must be spent for the growth and development of that trade. The legislation also imposes a time limit – broadly, three years from issue for SEIS and two years from issue for EIS, with some flexibility for KICs.
The use-of-proceeds test is what stops the schemes being used to acquire businesses, repay shareholder debt, return capital, fund existing operations that were going to happen anyway, or pay for activities that are not really part of the trade. It is a test about what the money is for, not just about what the company is.
How HMRC reads for it
The application form asks how the funds will be used. The answer is read against the financial forecast in your business plan, the use-of-funds slide in your pitch deck, and any narrative description of your raise strategy. HMRC is looking for three things: that the money goes into the qualifying trade, that it goes into growth (not maintenance of an existing position), and that the planned spend can be completed within the time limit.
Generic phrasing – "working capital", "general corporate purposes", "scaling" – is read as evasive. Specific phrasing that maps to growth – "hiring engineers", "expanding into new markets", "building the next major product release", "scaling customer acquisition" – is read as qualifying. Specific phrasing that maps to non-qualifying purposes – "buying out an early investor", "acquiring a competitor", "paying down director loans", "repaying convertible notes from previous rounds" – is read as disqualifying.
What good looks like
A use-of-proceeds statement that names specific cost categories, ties each to growth activity, and shows the total proceeds being deployed inside the relevant time window. If your raise includes a tranche for any non-qualifying purpose (say, paying off a bridging loan), separate that tranche from the SEIS or EIS allocation and say so explicitly. Investors can fund the non-qualifying part out of scheme; HMRC funds the qualifying part.
Common failure modes
A single operating principle covers most of what follows: any non-qualifying use can be funded outside the scheme, but only if it is explicitly ringfenced and disclosed. Trying to slip a non-qualifying tranche through inside the SEIS or EIS round is the most common pattern. Naming it, separating it, and funding it from other sources is the standard fix.
Acquisitions of any kind.
Acquiring shares in or the assets of another company is not a qualifying use of proceeds. This is one of the most common – and most consequential – refusal grounds. If your strategy involves any acquisition, it must be funded outside SEIS and EIS, and the application must say so.
Repayment of existing debt.
Paying off director loans, convertible notes, bridge financing, or any pre-existing liability is non-qualifying. If a portion of the raise is needed to settle these, structure that tranche outside the scheme and disclose it.
Buying out existing shareholders.
Even a small secondary sale by an early investor or founder taking partial liquidity is non-qualifying use of new investor money. The simplest fix is to keep secondary out of the round entirely; if it is unavoidable, it must be transparently disclosed and funded outside the scheme.
Capital expenditure on excluded assets.
Buying property (other than for the trade's own operational use), buying significant land, or acquiring assets that themselves give rise to excluded activity – all read as non-qualifying.
Spend that cannot complete inside the time window.
Three years for SEIS, two for EIS. A raise that intends to be spent over five years on a slow R&D programme is not necessarily disqualified, but the application must show how the SEIS or EIS tranche specifically will be deployed inside the window. KICs get longer; everyone else does not.
The asset spend cap.
Practitioners observe that HMRC reviewers pay closer attention to applications where a substantial proportion of proceeds goes into capital assets rather than operating expenditure – a working rule of thumb is anything materially above roughly a fifth of the raise, though caseworkers vary in how strictly they apply the heuristic. This is a practitioner observation, not a published HMRC threshold. The legislation does not set a hard ratio. Applications showing higher asset-spend ratios are not automatically refused, but they attract closer scrutiny on whether the spend is genuinely growth-related rather than a way of moving funds into recoverable form.
HMRC will fund the building of the business. It will not fund the rearranging of who owns it, nor the paying-off of who built it.