Knowledge-intensive EIS

From 6 April 2018 the EIS allowance has effectively doubled. It is now possible to invest up to £2 million in EIS, provided anything over £1 million is invested in “knowledge-intensive” companies.

In addition, “knowledge-intensive” companies can receive up to £10 million in EIS funding in a year, up from £5 million.

The rules have also been relaxed so in some cases it is possible to invest in companies which have been trading for more than 10 years (the current requirement for knowledge-intensive companies). 

What does ‘knowledge-intensive’ mean?

Broadly speaking, the expression refers to young and innovative businesses. So, for instance, a company which is developing a new drug or treatment would likely fall under the umbrella. A chain of shops opening new sites most likely won’t. 

As you would expect, though, HMRC has set specific requirements a company must meet to be categorised as knowledge intensive.

Firstly, there is an ‘operating costs’ condition. When it issues shares the company must have spent:

  • at least 15% of its operating costs on research and development or innovation in one or more of the previous three years (or in the three years following investment for a new company); OR
  • at least 10% of its operating costs on research and development or innovation in each of the previous three years (or in the three years following investment for a new company).

In addition, the company must meet either an ‘innovation’ or ‘skilled employee’ condition.

The first, the ‘innovation’ condition, requires a company to be creating or have recently created intellectual property, that it will use for its main business activities.

A wide variety of companies could qualify. Scientific companies are probably the first that spring to mind but are not the only ones. A cartoon character created by an animation company could well be that company’s protected intellectual property; so could a piece of software, an app, or a machinery component. 

To pass the ‘skilled employee’ test, at least 20% of a company’s employees must hold postgraduate degrees in a subject relevant to their job and must be engaged in research and development. 

What other benefits do knowledge-intensive companies enjoy?

The first raft of changes in favour of knowledge-intensive companies was introduced in 2015. Since then, knowledge-intensive companies can:

  • receive up to £20 million funding through the venture capital schemes over their lifetime (normally £12 million);
  • qualify for EIS if they have up to 499 employees (normally 249);
  • qualify for EIS if they have been trading for up to 10 years (normally 7)

The 2017 Autumn Budget relaxed rules further. From 6 April 2018 knowledge-intensive companies are able to receive up to £10 million of EIS or VCT funding per year (up from £5 million). In addition, whilst before they could receive funding up to 10 years from their first commercial sale, now the 10-year clock could start when their annual turnover first exceeds £200,000.

All these changes mean knowledge-intensive companies can receive more funding over a longer period of time.

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