Since the Enterprise Investment Scheme (EIS) was launched in 1994 thousands of small UK companies have used the government boon to raise growth capital for their businesses. According to HMRC statistics, in the 2017-18 tax year 3,920 companies raised a total of £1.93 billion of funds under EIS. Since launch, that took the total number of companies to 29,770 and funds invested to more than £20 billion.
To give a broad overview, EIS offers investors in qualifying companies a range of generous tax benefits, including income tax relief, loss relief and exemption from capital gains tax. To encourage long-term investment, the shares must be held onto for a minimum length of time, typically three years, before the tax reliefs can be claimed. Normally, companies can raise up to £5 million each year through EIS and a maximum of £12 million during their lifetime.
However, in order to further encourage the development of the UK’s knowledge economy, the government makes it easier for so called “knowledge intensive companies” to raise EIS funds. Broadly, knowledge intensive companies (KICs) are those that are carrying out research and development at the time that they are issuing shares and are looking to make revenues from exploiting intellectual property.
As a knowledge intensive company, you can raise up to £10 million of EIS investment per year (double the usual £5 million) and £20 million over the company lifetime (up from £12 million). Criteria that other companies have to meet are also relaxed, with KICs allowed to raise money up to 10 years following their first commercial sale, as opposed to seven for non-KICs. Also, KICs are allowed to have up to 499 full-time equivalent employees when the shares are issued compared to fewer than 250 for other firms.
In order to qualify as a KIC there are also terms regarding operating costs and employee skill levels.
To qualify as a KIC you must spend money from your overall operating costs on research, development or innovation. This should be either 10% a year for 3 years or 15% in one of 3 years. If your company is at least 3 years old, you must have done this in the 3 years before the investment. If your company is less than 3 years old, you must do this in the 3 years following the investment. You’ll need to submit a schedule, supported by accounts to show that you have.
For employees, 20% must be carrying out research for at least 3 years from the date of investment – these employees must be in a role that requires a relevant Master’s or higher degree. They must also be carrying out work to create intellectual property and you should expect the majority of your business to come from this within 10 years.
If you are a Knowledge Intensive Company looking for money to expand your business, Crowd for Angels can help with both EIS applications and fund raising. For more information visit https://crowdforangels.com/funding