Five reasons EIS applications get rejected (and how to fix them)

For many founders, applying for EIS (the Enterprise Investment Scheme) is a key mechanism that will help them to secure funding from prospective investors.

Securing investment under these schemes is not guaranteed, and you’ll need to satisfy HMRC’s requirements in order to access the tax incentives associated with them.

With guidelines on risk, qualifying trades, share rights, and use of funds, more founders are running into delays, additional scrutiny or outright rejection, often because they misunderstood what HMRC is actually assessing.

The good news is that many of the common issues are avoidable if you frame your application correctly.

Here are five of the biggest reasons EIS applications get rejected, what HMRC is really looking for, and how founders can avoid common mistakes.

1. Your business isn’t carrying out a ‘qualifying trade’

Under EIS, your company must be carrying out a qualifying trade as stipulated by HMRC. It’s easy to assume that if your business is in the technology industry, it’s safe - this isn’t always the case.

Common excluded activities include:

• Coal or steel production
• Farming or market gardening
• Leasing activities
• Legal or financial services
• Property development
• Running a hotel
• Running a nursing home
• Generation of energy
• Production of gas or other fuel
• Exporting electricity
• Banking, insurance, debt or financing services
• Dealing in land or commodities

What matters is what the company does commercially, and how this is framed for HMRC.

This becomes especially important for businesses seeking EIS that operate on a hybrid business model.

For example, if your company is a SaaS business but earns revenue through lending commissions or property-backed income, you may accidentally drift into excluded activity territory.

HMRC also checks to see how much revenue comes from excluded activities. If a significant portion of your business (typically 20% or more) falls into excluded activities, you may not qualify.

They are essentially checking that your core business structure is compliant with their guidelines, and your core revenue generation is from eligible sources.

How to fix:

Before applying for EIS, founders should look beyond the pitch deck and their understanding of their business model, and focus on:

• Where revenue comes from
• How the business is described in legal terms
• Whether any non-qualifying activity exists within your business model

This is particularly important if the business model has evolved since incorporation. If there’s any ambiguity, it’s better to address it directly rather than hope HMRC interprets the model favourably later.

2. The ‘risk-to-capital’ condition isn’t satisfied

In practical terms, HMRC wants EIS to benefit investments that face genuine financial risk, and offset some of that risk by providing investment relief.

Since the Finance Act 2018, HMRC has targeted arrangements that appear designed to preserve investor capital whilst still benefiting from tax reliefs through their risk-to-capital clause.

This is where founders sometimes unintentionally create problems.

Many investment decks try to reassure investors by emphasising:

• Predictable returns
• Guaranteed income
• Low-risk opportunities
• Downside protection

But those are exactly the kinds of signals that can raise red flags during an EIS review. To make matters harder, their approach rests in the principles of a company’s growth plans, rather than a specific formula or checklist.

HMRC wants to ensure that the investment is going to a company that has genuine long-term growth plans and commercial uncertainty.

How to fix:

Founders should focus on explaining:

• Why capital is needed
• How the funds will drive growth
• What commercial risks exist
• How the business intends to scale

It’s recommended to create a separate pitch deck to the investor-facing one, that’s then submitted to HMRC during your application. This should include a slide on risk-to-capital that details how your business satisfies this condition.

For more details on building this pitch deck, check out our blog.

3. Your advance assurance application looks 'speculative'

Advance assurance is not technically mandatory, but most investors expect it in place before committing capital. It’s important to note that HMRC no longer accepts speculative applications for advance assurance.

This is where HMRC expects to see evidence of real fundraising conversations happening, including lists of potential investors and intended investment amounts.

Some founders submit applications far too early:

• Before investor conversations start
• Before fundraising strategy is clear
• Before anyone has shown serious interest

HMRC doesn’t want to deal with hypothetical exercises, and is only interested in applications that form part of the real fundraising process.

How to fix:

Demonstrating to HMRC that a majority of the total investment amount you're seeking is backed by your potential investor list is a great way to satisfy this condition.

Before submitting:

• Engage prospective investors first
• Maintain a communication list of interested investors
• Document conversations and soft commitments
• Ensure the raise is commercially credible

Founders do not necessarily need signed commitments, but they should be able to demonstrate active investor engagement and realistic fundraising intent, and viable investors within your industry.

4. Insufficient detail around your use of funds

EIS money can’t be used in any way the company deems fit. Under the legislation, funds must be raised for a ‘qualifying business activity’ and used for the purposes of that activity.

This means HMRC expects the investment to support growth, development or expansion of the qualifying trade.

Problems arise when founders use funds to repay loans, acquire businesses, divert money into excluded activities, or make purchases that aren’t necessary for genuine business growth.

How to fix:

You should be able to clearly demonstrate:

• How funds are being deployed
• How this deployment supports growth
• How spending aligns with the qualifying trade and business activity

It’s worth including this directly in your HMRC-facing pitch deck, with a breakdown of how you’ll spend the investment with specific allocation amounts. Focus on activities that will scale the business, such as product development, hiring new employees, and marketing.

Any asset purchases should be minimised within this plan unless necessary to the growth of your business.

5. Your share structure breaches EIS requirements

EIS relief requires investors to receive ordinary shares with no preferential rights attached. Problems may emerge when founders introduce:

• Complicated preference rights
• Side agreements
• Return guarantees
• Investor advantages

Corporate investors and sophisticated angels may request additional protections, but if these rights distort the ordinary share position too heavily, it may render the investment ineligible for relief.

HMRC also expects transparency around structures involving redeemable rights, preferential returns or arrangements that could reduce investment risk.

This is particularly important in instances where some investors have preference shares, founders are using convertible instruments, or where investments are being raised through an RUV. These aren’t immediate red flags, but their structure needs consideration.

Unclear investor rights and messy documentation can cause unexpected issues with eligibility.

How to fix:

Keep share structures as transparent as possible. Before issuing shares:

• Review shareholder rights carefully
• Ensure investors providing capital through EIS have ordinary shares only
• Avoid hidden preferential treatment
• Provide a clear paper trail of documents that align with EIS rules

EIS is about substance, not just forms

It’s easy to think that EIS applications are admin-heavy, but understanding that this is more of a holistic review of your business and alignment with EIS principles is a great way to reduce conflict and smoothen the application process.

HMRC wants to know that your business qualifies, and that the investment will be used to accelerate growth in an otherwise uncertain situation.

The best EIS applications tend to share the same characteristics:

• Clear qualifying activity
• Straightforward share structures
• Credible fundraising plans
• Transparent documentation
• Genuine growth ambition

Most rejections don’t happen because founders are trying to ‘game’ the system. They happen because companies grow quickly, structures evolve, and the EIS position gets lost in the rush.

That’s why founders who think about EIS from the beginning usually find fundraising significantly easier later on.

Check your eligibility with InVestd Raise

EIS eligibility can get complex, especially as your business grows.

With InVestd Raise, we help founders navigate the process with greater clarity and confidence - from understanding key requirements and preparing applications to handling HMRC communications along the way. 

Whether you’re planning an early-stage raise or preparing for further growth, our platform streamlines the journey and reduces admin at every step. 

Book a call today to see how we can make your fundraising journey as seamless as possible.