EIS Industry Report 2019/20

16 17 KNOWLEDGE INTENSIVE COMPANIES A BRIGHT FUTURE As part of the changes referred to previously, the Autumn Budget 2017 announced that a “new knowledge-intensive EIS approved fund structure will be consulted upon, with further incentives provided to attract investment”. This consultation took place from 18 March 2018 and in July 2019 the government published legislation in the Finance Bill 4 that included powers for HMRC to set appropriate conditions and approve funds. There are also some requirements relating to the diversification of the fund: it must be invested in a minimum of four companies, and the amount invested in any one company “should not exceed 50% of the fund capital”. Given the desire from investors to increase diversification, it may be that managers choose to go beyond these minimum requirements in practice. While the legislation confirms it is not necessary to obtain such approval for an investment fund in order for the individual investors to qualify for EIS relief, it adds that approval does have certain advantages: “In particular, an individual who invests in an approved KI fund may be able to obtain relief earlier than if the fund had not been approved.” In response to a Freedom of Information request, HMRC told us that 199 EIS companies had successfully applied to become knowledge-intensive companies (KICs) between April 2018 and July 2019. When broken down by year, the HMRC statistics show that there is an appetite among KICs for this funding route, with more successful applications in the first seven months of 2019 than during the last nine months of 2018. This suggests that KICs taking the time and money to seek funding this way believe investors will find it an attractive investment that is likely to become more interesting as the government’s new legislation comes into force. However, what the figures do not show is how many applications HMRC received altogether, including ones that it rejected. The department explained that its database “only holds information on approved applications; unsuccessful applications are not recorded”. Therefore, many more companies may have applied to become KICs than is captured in HMRC’s data. Indeed, concerns remain over what does and does not qualify as a ‘knowledge-intensive’ company. Despite HMRC’s guidance on the issue, some advisers have warned that it is difficult to get the department to give a view on any specific cases. And EISA’s director-general Mark Brownridge told us that he has concerns over how effective the new fund structure will be at bringing in genuinely new investors. He suggested more incentives should have been given to bring investors to KICs instead of standard EIS funds. “There was an opportunity to give more benefits to investors, for example [steps to allow much quicker] up-front tax relief,” he said, referring to the length of time it can take for funds to be deployed and for the relevant EIS forms to be processed. “EIS investments can take up to 18 months to get tax relief, so that would have been attractive. So I worry that not many investors will take advantage of KICs.” However, the rule allowing investors in an approved KI fund to set their income tax relief against liabilities in the tax year in which the fund closes does mean there will likely be less waiting around for funds to be fully deployed. It will also give advisers more clarity on what year their investors' funds will be deemed as invested and therefore what tax years they can claim the reliefs for. “The new EIS-qualifying ‘knowledge-intensive’ businesses can help to ensure that the UK remains a global leader in research and innovation.” — REUBEN WILCOCK, VENTURES DIRECTOR, BLACKFINCH NUMBER OF APPROVED KICs APR - DEC 2018 96 103 JAN - JUL 2019 Market Update / Knowledge Intensive Companies THE KNOWLEDGE-INTENSIVE FUND The rules will be amended to introduce an ‘approved knowledge-intensive fund’ that will: • require the funds to focus on investments in knowledge-intensive companies • give approved funds a longer period over which to invest fund capital (requiring 50% investment within one year of the fund closing and 90% within two years, compared to the current requirement of 90% within one year) • require that within the 24-month period, at least 80% of the individual’s investment in the fund is represented by shares in companies which are knowledge-intensive companies at the time the shares are issued. • allow investors in an approved fund to set their income tax relief against liabilities in the tax year in which the fund closes, or against their liability in the year to the fund closing. SOURCE: HMRC