What is a knowledge-intensive EIS fund?
In November 2016, the government made an announcement that they would be reviewing Patient Capital as HM Treasury wanted to facilitate greater access and increase the supply of long term capital to innovative companies in the UK. The hope was that the review would allow increased assistance to growing companies in need of financial backing.
As a result of the review, the Autumn Budget included a 10-year action plan committed to unlocking over £20 billion, all of which would go towards financing the growth of UK innovation.
Changes to EIS: Knowledge-intensive companies
Modifications to the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) tax reliefs were announced after the start of the 10-year action plan.
In 2018, the government published a consultation ‘Financing the growth in innovative firms: EIS knowledge-intensive fund’ regarding innovation and capital access, leading to a response that proposed extensions to the schemes to facilitate the inclusion of ‘knowledge-intensive’ companies (KICs) focusing on research, development, and innovation.
These extensions include:
- Doubling the annual investment limit for EIS investors to £2 million. This is only if any amount exceeding £1 million is invested in KICs.
- Doubling the annual investment limit per year for KICs from £5 million to £10 million through the EIS and by VCTs.
- Providing greater flexibility for knowledge-intensive companies to determine when the 10-year age limit on receiving investment begins.
- Allowing KICs to be granted up to £20 million of investment in their (and any subsidiary’s) lifetime.
A number of initiatives have been launched since. This includes British Patient Capital (a subsidiary of the British Business Bank) in June 2018, which has been granted £2.5 billion to invest in promising companies in order to aid and fast-track their growth.
What does knowledge-intensive mean?
When a company is ‘knowledge-intensive’ it means that it is carrying out research and development or innovation at the same time as issuing shares. The practical implication is that the company has special status under EIS, meaning it can raise more EIS investment, more flexibly than non-knowledge-intensive companies.
Nevertheless, even if your company does qualify as ‘knowledge-intensive’, this doesn’t mean that you should apply for EIS as a knowledge-intensive company.
This is simply because it may be unnecessary. You should only apply as a knowledge-intensive company if you need to raise more money than the usual scheme limits allow, your company is older than the usual scheme limits allow, or your investor wants to make use of higher investor limits.
Knowledge intensive companies: How to qualify
You may still be unsure about the specifics of what makes a company a KIC.
Put simply, the company in question must meet the operating costs condition, plus either the innovation condition or the skilled employees condition by the time the share issue takes place.
These conditions are detailed below:
- The operation costs condition has a research and development (R&D) and innovation focus. This should be evidenced by the company having spent at least 15% of its operating costs on innovation or R&D in at least one of the last three years. In addition, in the last three years, 10% of operating costs should have been allocated to R&D or 15% of operating costs in one of the first three years.
- The innovation condition requires evidence that the company has created or is creating intellectual property at the share issuing time. Within 10 years of the share issue, intellectual property must be shown to create new products that will form the larger part of the company’s business.
- The skilled employees condition demands at least 20% of the full-time workforce is directly involved in R&D and holds a higher education qualification (e.g. a relevant degree or PhD). The company can have up to 499 employees.
In addition, the company must receive investment under EIS within 10 years of either the first annual turnover over £200,000 or first commercial sale.
Benefits of knowledge-intensive EIS
Knowledge-intensive EIS makes it easier for qualifying innovative companies to access long term capital. Qualifying for knowledge-intensive EIS can greatly benefit your company. This is because the EIS conditions are slightly different (and more favourable) towards knowledge-intensive companies.
For instance, companies raising their EIS or VCT investment are generally required to be within seven years of their first financial sale. Knowledge-intensive companies are given a ten-year limit.
Furthermore, knowledge-intensive companies have a lifetime EIS funding limit of £20 million rather than £12 million and an annual investment limit of £10 million rather than £5 million.
The government has also doubled the amount that individuals can invest through an EIS from £1m to £2m, provided any amount above £1m is invested in knowledge-intensive companies.
Approval of knowledge-intensive funds
Changes have been introduced which places some new constraints on fund management. These changes take the form of amendments introduced by the government in the 2019 Finance Bill.
As such, the following conditions for approving knowledge-intensive funds came into effect on 6 April 2020:
- Regarding capital to be invested, 50% must be invested within 12 months of the fund closing date.
- Within 24 months, 90% of the capital must be invested within 24 months of the fund closing date.
- In the 24 month period, at least 80% of the funds raised must be invested in knowledge-intensive companies.
- HMRC must be provided with information by the fund manager relating to their fund.
These requirements must be met by fund managers and aim to ease the financing of knowledge-intensive firms, allowing them to scale-up.
Benefit from EIS with Films4U
Knowledge-intensive EIS is just one investment scheme investors can choose.
At Films4U our investors can benefit from tax-efficient investments through EIS, giving them income tax relief, CGT exemption, loss relief, and inheritance tax exemption.