EIS: alive and KICing for companies that innovate

This post is part of our Entrepreneurial team’s regular series of blogs.

There have been many tweaks made to the Enterprise Investment Scheme (“EIS”) since its inception in 1993. Mostly, these have toughened qualifying conditions. However, seeking to advance its use in certain companies, HMRC introduced significant relaxation of several EIS limits. This relaxation of the rules was only made available to Knowledge-Intensive Companies (“KICs”), which are the types of companies in which the majority of Scottish EIS investment funds are placed. This blog will explore the benefits and qualifying requirements of being a KIC.

The benefits of being a KIC

  • A company can raise £10m EIS investment per year and £20m EIS investment over the company’s lifetime (in comparison to £5m and £12m limits, respectively, for non-KICs).
    In addition, investors can claim tax relief on up to £2m worth of EIS investment, if at least £1m of this is invested in KICs.
  • A company can receive its first EIS investment up to 10 years from the end of the accounting period in which its turnover first exceeded £200,000 (the time limit being only 7 years from first commercial sale for non-KICs).
  • A company may have a maximum of 500 full-time employees (with the maximum for non-KICs being limited to 250).

How to qualify as a KIC

To qualify as a KIC, a company must meet two conditions: the operating costs condition and either the innovation condition or the skilled employee test:

Operating costs condition

  • The company must have spent:
    • at least 15% of its operating costs on research and development or innovation in one or more of the previous three years (or in the three years following investment for a new company); OR
    • at least 10% of its operating costs on research and development or innovation in each of the previous three years (or in the three years following investment for a new company).

Innovation condition

  • the company must be carrying out work to create intellectual property and expect the majority of its income to come from this within 10 years.

Skilled employee test

  • the company must have 20% or more of its employees carrying out research for at least 3 years from the date of investment, and these employees must be in a role that requires a relevant Master’s degree or higher.

In Summary

For most technology-based or R&D companies, the KIC conditions will be relatively easy to meet. However, HMRC will only provide pre-investment assurance of KIC status through its Advance Assurance regime if a company actually requires this status in order for the investment that it receives to be EIS qualifying i.e. to get within one of the higher limits that are permitted for KICs. If the limit in question is the investor one (i.e. if any investors are relying on the company being a KIC for their own personal EIS annual investment limit), the company must provide HMRC with the investor’s details and notify them of the investor’s requirement for their investment to be in a KIC.

These rules provide hope for companies that might, due to their age, have disregarded the possibility of receiving EIS investment. If you are interested in exploring the availability of EIS, please get in touch and we can discuss further.