EIS Industry Report 2018/19

16 17 Given the nature of the conditions, they are open to some level of interpretation. Professional body AAT, said: “Our main observation is that the draft guidance contains insufficient detail in several important areas. In particular, there is little to illustrate the meaning of key terms, such as grow and develop or long term, or to identify what practical steps companies will need to take to demonstrate that the risk-to-capital condition (‘the condition’) is met.” 15 Martin Trott, a member of the HMRC policy team, said at a Q&A session at HM Treasury in May 2018: “The guidance cannot be expected to cover every possible permutation and the minutiae of individual cases. It is going to be a balance between what we can include that will be useful, without expanding the guidance to the point where it becomes unusable. “As we see issues, we can consider putting further examples with further explanation in the guidance.” 16 How HMRC is approaching Advance Assurance applications As was discussed earlier in this report last year, HMRC committed to a 15-working day turn around on Advance Assurance applications. One of the issues is that the team that deals with Advance Assurance applications is severely stretched. However, Cathy Wilson, a member of the HMRC policy team, explained at the HM Treasury Q&A how HMRC is going to cut down on wait times. “One issue has been around speculative applications. We’re saying no to them. We’re now concentrating on companies that have a very likely possibility of raising money. “We’ve been taking a slightly tougher approach on Advance Assurance applications. If it’s too complex, “We’ve been taking a slightly tougher approach on Advance Assurance applications. If it’s too complex, or the investment seems to be solely orientated around tax planning – we will say no.” — CATHY WILSON, MEMBER OF THE HMRC POLICY TEAM or the investment seems to be solely orientated around tax planning – we will say no. We haven’t got time to delve into these cases, and we haven’t got time to deliver a financial-planning service which we have perhaps done in the past. We’re having to take a more broad-brush approach; the reality is, the resource is not available.” Wilson also said at an EIS Association seminar in November 2018: ”Complex cases make up around 10% of total applications, but take up most of our senior inspectors’ time – this is unsustainable.” 17 In some respects, it was perhaps poor timing on HMRC’s part to tighten the turnaround time on Advance Assurance applications at the same time as implementing a new set of rules. How the risk to capital condition will be interpreted will take some time to become standardised, both by companies seeking EIS qualification and by HMRC itself. HOW ARE KNOWLEDGE-INTENSIVE COMPANIES DEFINED? One of the notable updates from the 2017 Autumn Budget was the extra investment headroom made available for knowledge-intensive companies (KICs). The Budget outlined the following changes in approach for KICs over other EIS investments. 19 The annual relevant investment limit for KICs is £10m (instead of £5m). The total lifetime relevant investment limit is £20m (instead of £12m). The age limit of the trade of the company is 10 years (instead of 7 years) and KICs have more flexibility on how this test is applied. Up to £2m can be invested in KICs in a tax year by individuals (instead of £1m), as long as any amount invested over £1m is invested into KICs. £10m £20m Following EU approval, these now apply from 6 April 2018: To qualify as a KIC, at the time of the investment, the company must meet: √ at least one of the two operating costs conditions and √ at least one of the innovation condition or the skilled employees condition In order to meet the operating costs condition, R&D or innovation costs must be at least 15% of the company’s operating costs in at least one of the previous three years, or at least 10% of the company’s operating costs in each of the previous three years. The skilled employees condition states that a minimum of 20% of full-time employees must be classified as ‘skilled employees’ at the time of investment and for the following three years. A skilled employee is an employee who is directly engaged in R&D or innovation, who holds a relevant higher education qualification required for their job role. The innovation condition states that the company should be engaged in work to create intellectual property (IP) at the time of investment, and within 10 years, most of the company’s business activities might be expected to consist of (i) the exploitation of the IP, (ii) business that uses the IP or (iii) both. DIGITALISATION UPDATE HMRC has updated its guidance regarding the digitisation of EIS forms. 18 HMRC confirmed that it isnow able to accept all compliance statements by email, with no need to post. There is now no requirement for wet signatures, and compliance certificates will be made available electronically. Similarly, forms can be completed without the need for an ink signature, and so can be issued to the investor in whatever form suits them. This update should speed up Advance Assurance, EIS1 submissions, and EIS3 issuances. Market Update / Tax and Regulatory Updates Market Update / Tax and Regulatory Updates