EIS guide

31 30 RULES FOR INVESTORS AND QUALIFYING COMPANIES RULES FOR INVESTORS AND QUALIFYING COMPANIES Rules governing the raising and spending of funds Likewise, there are rules governing the amounts that qualifying companies can raise and how quickly that money must be deployed within the business. The funds raised by the issuance of EIS- qualifying shares must be employed by the issuing company, or by a qualifying subsidiary which is at least 90% owned by the company, within two years of the share issue. The funds must be used either for carrying on a qualifying trade, or for preparing to carry on a qualifying trade which is then begun within two years of the share issue. They cannot be used to acquire the shares, goodwill or intangible assets of another company, even if that company is carrying on a qualifying trade. In calculating the maximum amounts that can be raised, funds raised from any of the UK’s tax-advantaged venture capital schemes must be counted. The FOUR schemes are: • The Enterprise Investment Scheme • The Seed Enterprise Investment Scheme • Social Investment Tax Relief • Venture Capital Trusts In addition, any other relevant approved risk finance State-aid must also be counted. This includes Enterprise Capital Funds and certain Regional Development funding. The maximum amount that a firm can raise from tax-advantaged venture capital schemes and any other form of risk finance State-aid in any 12-month period is £5 million (although for investments made on or after 6 April 2018, the 12-month maximum amount of funding that knowledge-intensive companies (KICs) can receive increased from £5 million to £10 million). The maximum amount that a firm can raise from tax-advantaged venture capital schemes (and risk finance explained above) cumulatively over the firm’s entire lifetime is £12 million (or £20 million for a KIC). LIFETIME INVESTMENT RAISE LIMIT LIFETIME INVESTMENT RAISE LIMIT (KICS) £20m £12m 12-MONTH INVESTMENT RAISE LIMIT 12-MONTH INVESTMENT RAISE LIMIT (KICS) £10m £5m Knowledge-intensive companies Knowledge-intensive companies are defined broadly as follows: • In at least one of three years prior to investment, the company or group has spent at least 15% of operating costs on research and development or innovation; or • In each of those three years, the company or group has spent at least 10% of operating costs on research and development or innovation; and either of the following conditions is also met: • The ‘innovation condition’ – When the relevant shares are issued, the company or group is engaged in the creation of intellectual property from which, within 10 years, it is expected, will derive the greater part of the company’s or group’s business, either from the exploitation of the intellectual property or by the creation of new products, processes or services which use the intellectual property. • The ‘skilled employee condition’ - At least 20% of the company’s or group’s employees are ‘skilled’ and are engaged directly in research and development or innovation activities carried on by the issuing company or any qualifying subsidiary of that company. The definition of ‘skilled’ relies on higher educational attainments. Since 6 April 2018, knowledge-intensive companies have been able to choose whether to use the current test of the date of first commercial sale or the point at which turnover reached £200,000 to determine when the 10- year period has begun. Knowledge-intensive companies will also be part of the new approved fund structure - the Knowledge Intensive Fund, expected to be introduced in April 2020. More generous rules for knowledge-intensive companies LIFETIME CAP ON TAX-ADVANTAGED VC AGE LIMIT EMPLOYEE LIMIT 12-MONTH RISK CAPITAL FUNDING LIMIT £20m £10m 10 YRS 499 WHAT IS RESEARCH AND DEVELOPMENT? R&D for tax purposes takes place when a project seeks to achieve an advance in science or technology. The activities which directly contribute to achieving this advance in science or technology through the resolution of scientific or technological uncertainty are R&D. Certain qualifying indirect activities related to the project are also R&D.