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Enterprise Investment Scheme (EIS) Spotlight: What is a Knowledge Intensive Company?

In the last year, HMRC introduced special preferential terms for knowledge intensive companies. The change is among the many EIS and VCT schemes changes announced by the Government in this year.
Enterprise Investment Scheme (EIS)

The £15 million risk capital amount limit set as the total amount a company can raise under EIS or VCT has been in force since the March 2015 budget when the HM Government announced. At the same time, the government also set £20 million as the total limit for knowledge intensive companies. The government also declared an increase in the allowable number of employees for knowledge intensive companies that raise money through EIS to 499 employees.

Changes to the Finance (No. 2) Bill followed later in the July 2015 budget. In the changes, the law required that the companies raise their first EIS or VCT investment within their first seven years of a commercial sale. Again, knowledge intensive companies were given a 10-year limit, whereas the total amount of risk capital went down to by £3 million to £12 million. After the Autumn Budget 2017 was announced in November 2017, the government enhanced terms, including the doubling of the amount that can be invested by individuals through EIS, from £1 million to £2million. There has also been an increase in the amount that can be invested in total in knowledge-intensive companies – from £5 million to £10 million.

Understanding the term 'knowledge intensive'

One of the key considerations in branding a company a knowledge intensive company is that it should, by the time the share issue is taking place, meet the operating costs condition plus either the invention condition or the skill-ful employee condition.

The operating expenses conditions stipulated the following:

  1. Companies ought to have spent at least 15 % of its operating costs on innovation, research and development (R&D) in at least one of the three preceding years. The operating costs are the expenses reflected in the profit and loss account or income statements in exemption of those incurred intra-group.
  2. Further, the company should have allocated 10% of the operating costs in each of the three relevant preceding years to R&D.

For innovation, the condition requires that the issuing company (EIS) illustrate that either the EIS Company has, at the share issuing time, created or be in the process of creating intellectual property. The companies should also illustrate that it is reasonable to assume that in a span of a decade of the share issue, the use or exploitation of the intellectual property will form the larger part of either the EIS companies’ business.

The company should create the more significant proportion of the intellectual property’s value, and it should retain the right to exploit it.

The skilled employees’ condition outlines education levels for employees, stipulating that at least 20% of employees hold a higher education and get directly involved in the company's R&D.

Both EIS must fulfil this condition from the period within which the issuing happens to the third anniversary of the issue. VCTs were, however, exempted as long as they have met the innovation condition. It also leaves out the total limit for five years after the investment period.

As a matter of definition, the last year of the “three relevant preceding years” ends either twelve months before the relevant shares issuing date or just before the start of the last company’s accounts filing period that ends before the share issue.

The importance of these conditions will gain prominence as companies at the limits of their EIS and VCT fund-raising make efforts to prove themselves as knowledge intensive.

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