What are ‘knowledge-intensive’ companies?
Companies considered ‘knowledge intensive’ benefit from a preferential treatment under the Enterprise Investment Scheme (EIS).
Broadly speaking, these are young and innovative businesses that are heavily investing in Research & Development (R&D) and are developing intellectual property. An example might be a company developing a new drug or treatment.
HMRC sets specific requirements for a company to be classed as knowledge intensive. It must have skilled workers and significant R&D or running costs supporting innovation.
To acknowledge this, HMRC allows
- knowledge intensive companies to receive more funding under EIS, and over a longer period
- Individual investors to invest up to £2 million in EIS in any single tax year, provided anything over £1 million is invested in knowledge-intensive companies.
You can invest in knowledge intensive companies directly or through a knowledge-intensive approved EIS fund.
What are knowledge-intensive approved EIS funds?
Knowledge-Intensive (KI) Approved EIS funds were introduced in March 2020.
A KI Approved fund must invest 80% of its portfolio in knowledge-intensive companies.
Provided certain conditions are met, a KI Approved EIS fund allows investors to set their income tax relief against liabilities in the same tax year the fund closes or to carry back to the previous year, whereas a conventional EIS fund will allow investors to claim tax relief based on the tax year in which each individual investment is made or carry back to the previous tax year.
To claim EIS tax relief, investors will have to receive their EIS certificate first:
- Investors in KI Approved EIS funds can expect to receive a single EIS5 certificate, issued by the fund once it has invested 90% of its capital, which it is required to do within 24 months of the close
- In contrast, investors in ordinary EIS funds will receive individual EIS3 certificates for each investee company as and when the fund deploys capital into that company
For capital gains tax deferral and inheritance tax relief the investment date is when the capital is invested in each company, not the fund close date.
Tax rules can change and benefits depend on circumstances. To maintain KI approved status, the fund or company needs to comply with requirements set out by HMRC. Should it fail to do so, it will impact investor tax relief.