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Knowledge Intensive EIS Funds: What are they and how can they help?

First introduced in the 2017 Autumn Budget as a new ‘HMRC approved EIS fund’ structure, Knowledge Intensive EIS funds are a funding structure dedicated to Knowledge Intensive Companies (KICs) to help accelerate innovation in the UK.


These funds act as a spin-off from the regular EIS system – giving greater allowances with looser requirements. Through Knowledge Intensive funds, KICs have a lot more flexibility to work around their research.


In this blog, we’ll cover who is eligible for Knowledge Intensive EIS funds, what the funds offer, and the advantages and disadvantages of the fund’s structure.


What is a Knowledge Intensive Company?


A Knowledge Intensive company (KIC) is a company dedicated primarily to research, development, and innovation.


To be considered a KIC and qualify for Knowledge Intensive EIS funds, a company must:

  • Carry out the development of Intellectual Property – projecting that this IP will become their primary area of business within 10 years.

  • Have at least 20% of employees working in positions that require a minimum of a Masters degree.

  • Have been conducting research for at least 3 years from the date of investment.

A KIC must also have invested a certain amount into research, development, or innovation – either:

  • 10% a year for 3 years, or

  • 15% in 1 out of 3 years.


A closer look at the fund


The very nature of KICs means that they often need to raise more money than regular companies, and need more time to do so.


This is because of their heavy focus on research and development rather than immediate company growth. As a result, the government gives them greater EIS flexibility to help them scale to the same level as regular companies.


Let’s compare Knowledge Intensive funds to regular EIS:

  • Up to £20 million can be raised in a KIC’s lifetime. For regular EIS investment, the limit is £12 million.

  • The maximum per year a KIC can raise through investment is doubled to £10 million.

  • For KICs, can receive investment within 10 years of their first commercial sale (or their annual turnover exceeding £200k). Through regular EIS, the maximum is 7 years.

  • KICs can have up to 500 employees rather than 250.

  • The investment limit for investors rises to £2 million – double what they can invest for regular EIS funds!

If a Knowledge Intensive fund wants HMRC approval, it must focus on investing in KICs. In fact, 80% of the fund’s investments need to go to KICs.


What are the advantages?


The extra money that can be invested is a huge bonus for KICs, but there are further benefits - especially for investors.


HMRC has made an effort to ensure that the tax relief process is as straightforward as possible in order to incentivise investment in R&D-focused businesses.


Firstly, investors can obtain tax relief much faster than they would for regular EIS funds. This is because Knowledge Intensive funds are already pre-approved by HMRC. As soon as the EIS certificate is completed and sent off, investors can claim tax relief.


The process for submitting tax returns is also streamlined for investors, making their tax planning easier. Once the fund has invested 90% of its capital into KICs, they only have to submit one EIS 5 certificate. For regular EIS funds, each company invested in requires its own individual EIS 3 form.


A further benefit is that investors can claim tax relief on their investment in the same tax year that they invest – it can also be carried back to the previous year, making it even more enticing!


What are the disadvantages?

As the fund focuses on KICs specifically, there are some drawbacks.


For one, the focus on research, development, and innovation KICs have means that the wait for any profit is longer than it would be for regular companies. This may seem off-putting to investors regardless of HMRC’s EIS concessions.


Very few companies actually qualify for Knowledge Intensive EIS funds. The fund is limited by its own extensive requirements, making it far less utilised than the regular EIS fund.

Furthermore, the fund has to close before investments can be placed, preventing the funds from being added to periodically, and stopping investors from splitting their funds into smaller investments.

 

For research-focused companies who exceed the requirements for regular EIS funds, or need a little more investment and time, Knowledge Intensive EIS funds are incredibly useful.

It’s important to note, however, that just because you qualify for this particular fund, doesn’t mean you have to use it! If you don’t need the benefits that this fund offers, you don’t have to apply for the EIS fund using your KIC status.


Instead, you can just use the regular EIS fund, and can still reassure investors by obtaining EIS Advanced Assurance.


Our partner, Jump Accounting, specialises in all things accounting. If you’d like to learn a bit more, or get advice on what EIS scheme your company is eligible for, get in touch with them about their services!

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