Given the more generous rules around investment parameters in ‘knowledge intensive’ EIS companies, we often get asked by advisers what is ‘knowledge intensive’?
Put simply, companies that qualify must conduct significant research and development, be developing intellectual property and employ a ‘skilled workforce’, as explained in more detail below.
Here are 3 key facts on ‘knowledge intensive’ EIS that may be helpful before discussing with clients:
1. Age limits
As part of the raft of changes in 2015/16, the law now requires companies that are raising their first EIS or VCT investment to be within 7 years of its first commercial sale. Knowledge intensive companies were given a 10-year limit, which ultimately widens the net for which companies can receive funding and will help drive capital into this area.
2. Annual and lifetime investment limit
Knowledge intensive companies have a lifetime EIS funding limit of £20m, compared to £12m. The annual investment limit for knowledge-investment companies will also increase from £5m to £10m through EISs and VCTs.
3. What makes a company ‘knowledge intensive’?
The key test is that it meets the operating costs condition, plus either the innovation condition or the skilled employees’ condition, by the time the share issue takes place.
a) Operation costs condition – R&D and innovation focus
To be knowledge intensive, a company must have spent at least 15% of its operating costs on innovation and/or research and development in at least 1 of the 3 preceding years. Further, the company should have allocated 10% of the operating costs in each of the 3 preceding years to R&D.
b) Innovation condition i.e. creating intellectual property
This requires the issuing company to demonstrate it has created or is in the process of creating intellectual property at the share issuing time. The company should also show within 10 years of the share issue, the use of the intellectual property to create new products will form the larger part of the company’s business.
There are a wide range of companies that may qualify including scientific, technology or software companies, or perhaps machinery, website code or an app.
c) Skilled employees’ condition
This stipulates at least 20% of the company’s full-time employees should hold a higher education qualification and be directly involved in its R&D and innovation. For example some of the workforce could be PhD qualified or have degrees in relevant subject areas.
Lastly, knowledge-intensive companies can have up to 499 employees (normally 249).
In practical terms what does this mean for your client?
The Government have doubled the amount that can be invested by individuals through an EIS from £1m to £2m from 6 April 2018, provided any amount above £1m is invested in knowledge-intensive companies.
New EIS fund structure on the horizon?
A consultation paper issued alongside the Spring Statement considers the creation of a new type of EIS fund, primarily for knowledge-intensive firms, to replace the existing and little-used HMRC-approved EIS fund structure.
Ultimately, these rule change for the Enterprise Investment Scheme have been welcomed by the industry. The government wants to support young and innovative companies, in particular knowledge-intensive companies because of the volume and quality of the jobs they create and the wealth they produce for the country. At the same time, the government recognises that there is risk-to-capital, and therefore offers 5 generous tax reliefs to investors.
Investing in EIS is a high risk investment, and is not suitable for all investors. For full risk warnings please see here.