Tax issues after a tech startup funding round can easily be overlooked once the investment reaches the company’s bank account.
The shares may have been issued and investors may already be expecting their SEIS or EIS certificates. At that point, founders often assume that most of the tax work connected with the investment has finished.
In practice, some important tax issues arise after the tech startup funding round has completed.
Repaying a founder’s loan can require further consideration. So can changing how SEIS or EIS funds will be used, restructuring the company or changing its activities.
R&D raises another question. If the company uses some of the investment to fund qualifying development work, can it still claim R&D relief? Could a future R&D credit also extend its cash runway?
Before considering those questions, however, we need to establish something more fundamental.
What did your investors receive in return for their investment?
How are investments treated after a tech startup funding round?
Where investors subscribe for newly issued shares, the company does not treat the investment as trading revenue. It does not increase taxable trading profit simply because the cash has reached the company’s bank account.
Suppose Maya's SaaS company raises £500,000 by issuing new shares. The investment increases the company's cash and shareholders' funds, but it does not increase its turnover or turn an existing trading loss into a profit..
If the company issues 50,000 shares for £10 each and each share has a nominal value of £0.01, £500 represents nominal share capital. The company would normally credit the remaining £499,500 to the share premium account.
That is the relatively straightforward position. The more interesting questions arise when the funding round has been structured differently.
What if the investment wasn't a straightforward share issue?
A tech startup might describe itself as having "raised £500,000", but that does not tell us how the money actually reached the company
An investor might subscribe for shares immediately. Alternatively, the company might receive funds under an Advance Subscription Agreement (ASA), with shares issued later. Other rounds may involve convertible debt that subsequently converts into shares.
Each arrangement can put £500,000 into the company’s bank account. However, the legal, accounting and tax treatment can differ.
SEIS or EIS makes the structure particularly important because the terms and timing of the share issue can affect the investor’s relief.
This is why the first question after a funding round should not simply be, “How much did the company raise?”
It should also be: “How was the investment structured?”
What if the investment was raised under an ASA?
An Advance Subscription Agreement (ASA) can allow a startup to receive investment before issuing the corresponding shares. This can be useful where funding is needed now but the company's valuation will be established as part of a later funding round.
For a founder, that may appear to be little more than a timing difference. For SEIS or EIS purposes, the detail of the agreement can be much more important.
HMRC’s guidance describes an ASA as an agreement under which an investor provides funds to a company in return for shares to be issued at a later date. Where an investor expects SEIS or EIS relief, HMRC will consider the terms of the agreement when assessing whether the investment qualifies.
When can an ASA cause problems for SEIS or EIS?
HMRC expects an ASA intended to support SEIS or EIS to remain a relatively straightforward agreement to subscribe for shares. Features that make it behave more like a loan or give the investor additional protection can put the intended tax treatment at risk.
Timing matters too. HMRC considers whether the agreement sets a longstop date for issuing the shares. This would normally expect this to be no more than six months from the date of the agreement.
This can become particularly relevant when a UK startup raises money from overseas investors. A document based on a US SAFE, for example, should not automatically be assumed to satisfy the requirements expected of an ASA for UK SEIS or EIS purposes.
The commercial terms may suit both parties while the document still creates difficulties for the UK tax relief the investor expects to claim.
If SEIS or EIS relief forms part of the investment proposition, the company should therefore review the ASA before the investor transfers the money. Correcting the position after the funding has arrived may not produce the same tax outcome.
Can a US SAFE qualify for SEIS or EIS?
A US investor may be accustomed to using a Simple Agreement for Future Equity (SAFE) for early-stage investments
Although a SAFE and a UK Advance Subscription Agreement can appear commercially similar, founders should not assume that the terms of a US-style SAFE satisfy the conditions required for SEIS or EIS.
The company may have received the investment exactly as intended, but that does not necessarily mean the investor will qualify for SEIS or EIS relief. The terms governing when and how the company issues the shares still need to meet the relevant conditions.
Where SEIS or EIS relief is expected, the company should review the investment terms before the investor transfers the funds. Correcting the position after the investment has been made may not produce the same tax outcome.
Can changing how you use SEIS or EIS investment put the relief at risk?
Most SEIS and EIS planning takes place before the investment. Founders establish whether the company qualifies, consider advance assurance and agree the shares that will be issued to investors.
Those considerations do not become irrelevant once the funding round has completed.
For EIS, the company must use the money wholly for the qualifying business activity for which it raised the funds, apart from an insignificant amount.
HMRC also expects the business plan to explain why the company needs the investment. It should show how the company intends to use the money within the required timescale.
SEIS has a similar requirement. The company must also spend SEIS funds on the qualifying business activity for which it raised them.
Does the SEIS or EIS investment have to be used exactly as originally planned?
Suppose Maya's original business plan explained that the £500,000 investment would be used to recruit developers, complete the company's SaaS platform and acquire customers..
Nine months later, another technology company becomes available and Maya wants to invest £200,000 of the funds raised in acquiring its shares
Before proceeding, we would want to establish how that transaction fits with the conditions applying to the original SEIS or EIS investment.
HMRC specifically states that using EIS money to acquire shares or stock in another company does not, by itself, amount to employing the money for a qualifying business activity. The SEIS rules contain a corresponding restriction. However, the rules can allow a company to use the funds through a qualifying 90% subsidiary.
Does changing the business plan automatically cause a problem?
Not necessarily. A company is not locked into every detail of the business plan presented when it raised the investment.
The important question is whether the company continues to satisfy the relevant SEIS or EIS conditions and continues to use the investment for a qualifying business activity.
Growing tech companies rarely follow their original plans without some adjustment after a funding round. Product development may take a different direction. Recruitment may happen earlier or later than expected. The company may also reschedule development expenditure.
Changes like these do not necessarily divert SEIS or EIS funds away from a qualifying business activity. Instead, consider the nature of the change and how the company ultimately uses the investment.
What does SEIS or EIS advance assurance actually cover?
HMRC advance assurance can play an important role in a funding round. However, HMRC bases its response on the proposed investment and the information supplied at that time.
Founders should not treat advance assurance as a guarantee that every subsequent transaction will remain compatible with SEIS or EIS.
When seeking advance assurance, a company provides HMRC with information about the proposed share issue, its qualifying business activity and its plans for the investment. HMRC also requires undertakings about certain future intentions.
What should the company consider after receiving advance assurance?
Some SEIS and EIS conditions continue to apply after the company issues the shares. A later transaction may therefore need to be considered on its own merits rather than relying on the advance assurance obtained before the funding round.
For a funded tech company, a useful practical test is to ask whether a proposed transaction changes the company's ownership, its qualifying activities or how a significant amount of the SEIS or EIS investment will be used
If it does, check the SEIS or EIS consequences before signing the transaction or transferring the money.
Can SEIS or EIS investment be used to repay a founder's loan?
Founders often finance a startup themselves before external investors arrive.
Maya, for example, has previously paid £50,000 of company costs personally. The company therefore owes Maya £50,000 through her director’s loan account.
Once the company raises £500,000, she may understandably want some or all of that loan repaid
From an accounting perspective, the payment is straightforward: the company is settling an existing liability. But if the company has raised the new investment under SEIS or EIS, the accounting treatment is only part of the answer.
Two separate questions arise.
First, does using the newly raised money to repay an existing founder loan satisfy the rules governing how the SEIS or EIS investment must be used?
Second, if the founder is also an investor, could the repayment fall within the rules concerning value received by an investor
We would need to consider when Maya made the original loan, who subscribed for the SEIS or EIS shares and how the proposed repayment relates to the funding round.
You should therefore consider the director's loan account alongside the SEIS or EIS investment.
When can repayment of a debt affect SEIS or EIS relief?
A separate issue arises where the person receiving the loan repayment is also an SEIS or EIS investor
SEIS and EIS contain rules dealing with value received by an investor. HMRC’s EIS guidance specifically covers certain repayments of debts that a company owes to an investor.
This does not mean that every repayment of a director’s loan following a funding round threatens SEIS or EIS relief.
Check when the debt arose and why the company is repaying it. You should also establish whether the repayment formed part of arrangements connected with the share subscription.
If Maya provided the original £50,000 loan but unrelated external investors subscribed for all the SEIS or EIS shares, the position differs from one in which Maya herself subscribed for qualifying shares and later received money back from the company.
Before repaying an existing founder loan from recently raised SEIS or EIS funds, check both how the company may use the investment and whether the repayment could amount to value received by an investor.
How should founders be paid after a funding round?
Before raising external investment, founders often keep their own remuneration to a minimum. They may work without taking a salary, pay company expenses personally or leave money owed to them on a director's loan account
A successful funding round changes the company's cash position, but it does not make those different ways of receiving money from the company interchangeable
If Maya starts taking a salary for her work, the company will normally need to operate PAYE and account for National Insurance where applicable.
The company treats repayment of a genuine director’s loan differently. A dividend is different again and can only be paid where the company has sufficient distributable profits.
Why does the nature of the payment matter?
Suppose the company transfers £3,000 from its bank account to Maya. The bank transaction alone does not tell us whether it represents salary, repayment of a director's loan or a dividend
Establish what the payment represents when the company makes it. Then keep the appropriate payroll, accounting or company records to support it.
This can be particularly relevant for an early-stage SaaS company that remains loss-making after its funding round.
Having £500,000 of investment in the bank does not create distributable profits. The company therefore cannot automatically use that cash to pay dividends.
Where the company has raised SEIS or EIS investment, payments to founders who are also investors may require an additional check against the value-received rules discussed above.
How does R&D interact with a tech startup funding round?
Tax issues after a tech startup funding round can include R&D where the company uses investor cash to accelerate product development.
That raises an obvious question if the company is already undertaking qualifying R&D: does using investors' money to fund that work affect the claim?
For accounting periods beginning on or after 1 April 2024, the merged R&D scheme and Enhanced R&D Intensive Support (ERIS) removed the previous restriction on subsidised expenditure.
Equity investment does not, by itself, prevent a company from claiming relief for qualifying R&D costs funded from that cash.
Separate rules govern matters such as contracted-out R&D and overseas expenditure. The company still needs to establish which entity can claim and which expenditure qualifies.
Could an R&D claim change when you need to raise again?
Suppose Maya expects the £500,000 investment to finance 15 months of product development.
The company also undertakes qualifying R&D. A future R&D tax credit could therefore provide additional cash without Maya having to issue further shares.
That can be relevant when modelling the timing of the next funding round and the dilution that may come with it
The company should not, however, build an R&D payment into its runway as though it were guaranteed. It first needs to establish its eligibility, the qualifying expenditure and the likely treatment of the claim.
There is also a deadline that can easily be missed.
Some companies must notify HMRC before making an R&D claim. This can include companies making their first claim or returning to R&D claims after a sufficient gap.
Finding this out when the company prepares its Corporation Tax return may be too late.
What will investors check after your previous startup funding round?
A future investor will want to know more than what Maya’s company built with its £500,000. Due diligence can also expose problems with the previous funding round.
That can bring earlier decisions back into focus.
Do the share issues match the terms agreed with investors? Did an ASA convert as intended? Did the company consider SEIS or EIS when it subsequently used the investment? Do its R&D claims withstand scrutiny? Has it recorded founder payments correctly?
Problems that appear relatively minor between funding rounds can become much more significant when another investor and their advisers begin examining the company.
Does your cap table match the shares actually issued?
A cap table can look perfectly sensible while the underlying company records say something different
Maya may begin with founder shares, raise money under an ASA, issue shares when it converts, create an employee option pool and introduce a new share class during a later funding round. With each transaction, the cap table needs to reflect what has actually happened
Each transaction changes the company’s ownership records, so the cap table needs to reflect what actually happened.
That means checking more than the percentages shown on a spreadsheet.
The number and class of shares issued, their nominal value, the amounts paid for them and the dates of allotment should agree with the company’s statutory and accounting records.
The company should also make the required Companies House filings.
When do cap table errors usually come to light?
An investor appearing on the cap table as owning 8% of the company does not, by itself, establish that the company correctly allotted the shares or that its records and filings support the stated ownership.
Errors often remain unnoticed until someone independently examines the records. During a future funding round, that person may be the incoming investor's lawyer
Reconstructing historic share issues, ASA conversions or missing filings during due diligence can delay the transaction. It can also create questions that would have been much easier to resolve when the company originally issued the shares.
Why tax planning matters after a tech startup funding round
Tax issues after a tech startup funding round do not end when the investment reaches the company’s bank account. Some decisions made afterwards can be just as important as the structure of the original investment.
For Maya, that could mean checking SEIS or EIS before changing how the company uses its investment. It could also mean reviewing the position before repaying a founder’s loan or identifying an R&D notification requirement before the deadline.
None of these issues should prevent a technology company from adapting as it grows.
The advantage comes from identifying the tax consequences while the company can still structure a transaction correctly, rather than discovering them when the accounts are prepared or the next investor begins due diligence.
Funding is also only one part of the tax and accounting picture for a growing SaaS business. Revenue models, VAT, R&D, employee incentives and international expansion can introduce their own questions as the company develops
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