Bure Valley Group is an investment brokerage business which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
In 2017, the UK government made a host of changes to the Enterprise Investment Scheme (EIS) which were reinforced later in 2019. These developments have important implications for investors seeking to benefit from investing in EIS-qualifying companies, and also for businesses hoping to attain “EIS-qualified” status.
One of the most notable changes lies in the UK government’s efforts to try and divert investment away from “asset-based” businesses, and into “knowledge-intensive” ones instead. The former include companies such as restaurants where the property is owned by the EIS investor, which decreases the amount of risk. Here, the UK government has seen this type of EIS investment activity primarily as capital preservation on the investor’s part, rather than encouraging the kind of innovation EIS was originally intended to promote.
Here, our investment team at Bure Valley wanted to offer some valuable information about the nature of “knowledge-intensive” companies for EIS investors, as well as for business owners hoping to attain EIS funding. We hope you find this content helpful.
To find out more about our EIS investment opportunities, please see our portfolio page. To enquire about our latest projects and funding, you can reach us via:
+44 160 334 0827
What is a knowledge-intensive company?
EIS was introduced in 1992 by the UK government, intended to encourage private investment into innovative companies and thus help to stimulate the economy. By 2017, however, Philip Hammond (then Chancellor) introduced a series of measures to restrict which companies could receive investment under the scheme.
Instead, HMRC would issue special preferential terms for “knowledge-intensive” companies. In other words, for a company to stand a chance of attaining EIS-qualified status, it needed to show that it met the following criteria:
- Within the past three years, a 15% minimum expenditure on operating costs should comprise spending on innovation, research and development (R&D).
- At least 10% of the operating costs in each of the three relevant preceding years should have been allocated to R&D.
- The issuing (EIS) company should have created intellectual property at the share issuing time, or be in the process of doing so.
There is also a “skilled employees” criteria which require that at least 20% of employees must be directly involved in the R&D and should hold a higher education qualification.
Benefits of knowledge-intensive company (KIC) status
Assuming you can satisfy HMRC’s requirements to become classed as a “knowledge-intensive” company, there are a number of attractive benefits which suddenly open up to you as an EIS-qualified business. These include:
- An expansion of the total EIS investment you can receive each year. Now, you can attain up to £10m in funding instead of the previous £5m.
- An increase in the total amount of EIS funding you can raise across the lifetime of your business; up to £20m rather than the prior £12m cap.
- Business age benefits. Most other companies needed to receive investment within 7 years of their first commercial sale, in order to qualify for EIS. For a KIC company, however, you have a 10-year window instead.
- A raised employee threshold. Non-KIC companies needed to cap their maximum number of employees at 250 to qualify for EIS. A KIC, however, can have up to 500.
All of this adds up to a KIC potentially enjoying more funding over more years.
The application process
To apply for EIS-qualified status, you must first meet the requirements for EIS. These include:
- Having a permanent business establishment in the UK.
- Not trading on a recognised stock exchange (i.e. the company is unquoted).
- No control over other companies, except certain qualifying subsidiaries.
- Not being controlled by another company. No more than 50% of the shares can be owned by another company either.
- Before the share issue, gross assets must not exceed £15 million in value. After the issue, this figure raises to £16 million.
Assuming you meet all of the conditions for EIS and KICs set out by HMRC, you can ask the latter to check your application to see if it is likely to qualify for KIC.
Once the shares have been issued, you will be required to produce evidence and fill in a compliance statement from the government.
A positive note for investors
For those interested in EIS investments, one great advantage of KICs is that they open up more doors to invest in promising EIS-qualified companies. Normally, you can invest up to £1m into EIS companies within a tax year. If you invest in KICs, however, you can commit up to £2m.
If you are a successful investor looking for EIS investment opportunities, or if you are a business owner looking for funding, then we’d love to hear from you.
Get in touch today to start a conversation with our team, and discuss some of the great investment memorandums we have available:
+44 160 334 0827