Equity Finance for Knowledge Intensive Growth

Raising equity finance for growth - Knowledge intensive companies

The EIS and VCT schemes help unquoted trading companies raise equity finance by offering a range of tax incentives to their investors. The rules for ‘knowledge intensive companies’ (KICs) were relaxed on 6 April 2018, which may help you company raise equity finance for growth.

What is a knowledge intensive company?

Consider the flow chart below – broadly, if a company invests in R&D and derives, or will derive its revenues from that R&D, it is likely to qualify as a KIC.

What are the advantages of being a KIC?

Higher limit for investors

An EIS investor can normally only invest up to £1m in any tax year. Provided they invest at least £1m in KICs, they can now invest up to £2m for EIS relief.

Relaxed age limits

Broadly, to qualify for EIS/VCT investment, a company must be less than seven years old when the first EIS/VCT investment is made, with the seven years commencing when the company makes its first commercial sale.

For KICs, this is extended to 10 years, AND they can choose to date themselves from the end of the accounting period in which their turnover first reached £200k per year.

This has opened the door for EIS/VCT investment for many companies that were previously disqualified.

Higher annual investment limit

Most companies can raise a maximum of £5m per year from EIS, VCT and other State aid risk finance. KICs can now raise up to £10m in any year. The limit applies to any 12 month period, rather than the tax year, or a company’s accounting year.

Higher total investment limit

A lifetime EIS/VCT/State aid fundraising limit of £12m applies to most companies. For KICs, this is raised to £20m.

Relaxed employee numbers limit

EIS/VCT qualifying companies may have no more than 249 full time equivalent employees. For KICs, there is a higher limit of 499 employees.

New companies can now qualify

The original drafting to the KIC rules, meant that companies under three years old couldn’t qualify as KICs. This has now been changed, and companies can qualify as KICs in their first three years.

How can we help?

BDO can help with all aspects of the EIS, including preparing the advance assurance application, advising on any shareholders’ agreement or fundraising documents and completion and filing of the EIS1 declaration.

If you would like more information about the EIS or other issues surrounding equity investment in your business, please contact your usual BDO contact or Mark Ward.