As announced at the Autumn Budget 2017, and following on from the Patient Capital Review, the Government is creating a new ‘approved EIS Fund’ structure for investment into Knowledge Intensive Companies (KICs).
The rules regarding qualification as a KIC can be complex. Broadly, a KIC is a company which spends a significant amount on research and development, in order to develop intellectual property that will drive the greater part of its business in future.
Such companies tend to be high tech, life sciences and/or AI driven businesses, and the policy is intended to encourage further investment in these key sectors. It should help early stage, unquoted companies in this sector raise equity finance for growth.
The existing ‘Approved EIS Funds’ will no longer be available after 5 April 2020 but these have been little used in recent years, following the relaxation of the EIS income tax relief carry back rules.
The new approved KIC funds will be required to invest 90% of an individual’s investment in the fund in shares in companies within two years, and invest 80% of the investment into KICs, within 2 years of the fund closing.
For investors, the key advantage will be that the effective date for EIS income tax relief claims will be the date the fund closed, rather than the date the fund invests in the KIC. For example, an individual could invest in an Approved KIC fund that closes on 5 April 2022 and carry back the relief to the 2020/21 tax year.
In cash flow terms, relief will not actually be available until the fund manager has invested into the underlying investee companies. If the new rules where to give tax relief on the sum invested in the fund once, say, 50% of the money had been invested in qualifying companies, this would create a lot more interest from investors.
Our EIS fund manager clients gave a mixed response to the original proposals when they were announced. Some regard this as an opportunity to help raise more money for these key sectors. Others believe the burdensome approval process, reporting requirements and repercussions in the event of a breach of rules outweigh any benefits. Many EIS funds are already focussed on investing in the KIC sector and think the fund requirements will restrict their current flexibility.
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