At the time of last year's Autumn Budget, we talked on how it was expected there would be changes to tax efficient investing, particularly with regard to the Enterprise Investment Scheme (EIS). No one was sure if they were going to be in favour or against EIS, but it was generally agreed changes would be forthcoming.
But during the Budget, Philip Hammond, the Chancellor of the Exchequer, made the announcement that the aim was to make improvements to EIS and essentially make it so that it wasn't a scheme used for tax sheltering.
Undoubtedly a positive move, one of the most talked about points was the increased amount that can be invested into - and raised by - ‘knowledge intensive’ companies.
What is a knowledge intensive company?
For a business to qualify as a knowledge intensive company, they need to be developing an Intellectual Property (IP) that is expected to be the company’s main source of business 10 years from the date the company received investment.
Therefore, if your company is developing an idea or certain product that can be protected by trademarks and patents or other forms of protection, you could well be qualified to be a knowledge intensive company.
Not only that but the IP doesn't necessarily have to be a product - it can be something such as a piece of software, website code or an app. This means there is quite a broad range of companies that could fall under the knowledge intensive category.
Additionally, to qualify as a knowledge intensive company, the company must do one of the following:
- Spend a certain proportion of their operating costs on Research & Development or innovation - at least 10% of total operating costs in each of the three years prior to the EIS investment;
- Spend at least 15% of operating costs on Research & Development or innovation in one of the three years.
So why was this change made?
The driving force behind this change can be attributed to the government-published Patient Capital Review from earlier in 2017.
In this they expressed concern that the Enterprise Investment Scheme was not channeling enough capital to the correct companies. As a result, the worry was that the Chancellor may actually cut the amount of income tax relief investors get when they invest into EIS eligible companies - or even go as far as banning certain industries from participating.
However, thankfully this didn't happen.
The Chancellor instead announced that he would “ensure that EIS is not used as a shelter for low-risk capital preservation schemes”. The HMRC is making sure of this by only making EIS tax reliefs available when investors are actually at risk of losing their capital when investing into an EIS eligible company.
Putting the focus on knowledge intensive companies, these now have an EIS funding limit of £20m, whereas other companies have up to £12m. Such companies are now also able to raise up to £10m of EIS funding or other state-supported funding in a year, double what it used to be.
What’s more, individual investors can benefit from the fact they are able to now invest up to £2m in EIS eligible companies per year as long as £1m of that is into knowledge intensive companies.
Investing in early-stage startups
The fact knowledge intensive companies are able to raise more - and have greater sums invested into them by individual investors - can only be seen as a positive.
Being focused on early-stage companies, investing into EIS-eligible companies undoubtedly brings with it an element of risk - but particularly for those companies with IP, it's hard to argue against the fact these companies have already started to achieve a lot and a level of investment could go a long way to helping them achieve their future successes.