EIS for Knowledge Intensive Companies

As a result of the 2018 changes to SEIS and EIS, knowledge intensive companies are now able to benefit from an increased allowance in investment. Both SEIS and EIS have limits to their investment allowance due to the generosity of the tax relief. However, as the UK government seeks to boost economic growth, they want to encourage more private investment in small high-risk companies and so have given preferential treatment towards “knowledge intensive” companies.

What is a knowledge intensive company?

HMRC have issued defined guidelines as to when a business would be considered as knowledge intensive. At the times of issuing the shares (for SEIS or EIS), they must meet operational conditions AND either the innovation condition OR the skilled employee condition.

Operational costs conditions:

• Within the 3 previous years, there must have been at least one year where 15% or more of the operational costs was spent on research and development or innovation
  OR
• In the following 3 years of business, there should be at least 10% of operational costs dedicated to research and development expenditure

Innovation condition:

• The company, at the time of issuing shares, must have created or be in in the process of creating intellectual property.
• Further to that requirement, it should be reasonable to assume that within the following ten years of share issue, the intellectual property will be used as the primary business activity.
• If the intellectual property has been created with a third party, then the company must hold the majority value of the intellectual property and maintain the right to exploit it.

Skilled employee condition:

• At least 20% of the company’s employees holds a postgraduate degree in a subject directly relating to their research work
• Those employees are directly engaged in carrying out the R&D work necessary for creating the intellectual property

How do changes to EIS benefit knowledge intensive companies?

Knowledge intensive companies are now afforded a much more generous allowance. The total investment they are able to raise from EIS has increased from £5 million to £10 million. From an investor’s standpoint, they too are able to benefit as they are now allowed to invest a maximum of £2 million, up from £1 million, effectively increasing their tax relief also.

Not only that, but other rules have been relaxed. Previously, knowledge intensive companies had to secure investment within their first 7 years of trading, however this has now been extended to 10 years. The 10 years may also start when the company has reached an annual turnover that exceeds £200,000.

Another extension applies to the number of employees a knowledge intensive company can hire. The original limit was 249 employees, however this has now increased to 499, allowing for more companies to fall into the eligibility category and being able to benefit from the new EIS rules.