EIS investors hit with tougher rules amid allowance boost

EIS investors hit with tougher rules amid allowance boost

Following the smoke and mirrors of the politician’s speech, more details have emerged about changes to the enterprise tax scheme (EIS) investment landscape.

The top line announced in the Budget was the doubling of the EIS annual investment allowance that qualifies for tax relief to £2m from the previous £1m annually.

However the rules have also changed to mean that an investor who already holds shares in an EIS qualified company, cannot buy more shares in the same company and have the new shares also count for EIS tax purposes.

Graham Neale, partner at wealth management firm Killick and Co. said the more significant change is on how and how much "knowledge based" companies can raise.

These are companies heavily focused on research and development, seeking to create intellectual property.

Companies deemed to be “knowledge based” will be able to raise £10m instead of the previous £5m.

The £5m allowance was an annual figure per company, and companies could raise £5m a year in each of three individual tax years, a total of £15m.

Mr Neale revealed the changes announced in the aftermath of the Budget mean companies defined by HMRC as “knowledge based” will be permitted to raise £20m from EIS investors. Those companies considered not to be knowledge based will be permitted to raise £12m.

Companies that count as “knowledge based” must raise the money within 10 years of their first commercial sale. If the company does not meet the criteria for being knowledge based, then the cash must be raised within 7 years.

HMRC further defines knowledge based companies as those whose costs of research and development or innovation are at least 15 per cent of the company’s operating costs in at least 1 of the previous 3 years, or at least 10 per cent of the company’s operating costs in each of the previous 3 years.

They must also create, or be intending to create, intellectual property,

They must also have employees with a relevant Masters or higher degree who are engaged in research and development or innovation and who comprise at least 20 per cent of the company’s total workforce

For knowledge-intensive companies, the limit on employees will be raised from less than 250 to less than 500 employees.

The capital raised cannot be used to acquire another company.

Mr Neale said companies wishing to issue shares that qualify for EIS tax breaks will have to apply to HMRC to be deemed “capital at risk” investments, and so eligible for the tax breaks.

Gary Robins, head of business development at Growth Deck said the big question is what happens to companies that are defined as being neither low risk, and so ineligible for the EIS tax breaks, and those which are eligible for the enhanced allowances.

He said most companies in the EIS universe fit into that category.