Knowledge Intensive Companies: do you qualify?
We wrote extensively about EIS and SEIS schemes, how they can help you raise funds early on and how much UK investors love them!
We often mentioned that Knowledge Intensive Companies that qualify for EIS have special rules that allow for more generous allowances and more flexible conditions when raising funds. The thing is, a lot of innovative start-ups usually qualify as Knowledge Intensive Companies, but they might not even realise it, as the requirements are looser than you might think.
What is a Knowledge Intensive Company?
HMRC defines Knowledge Intensive Companies (KICs) as companies that are carrying out research, development or innovation at the time that they are issuing shares, however the requirements are a bit more specific than this.
But before deep-diving into the specifics, let’s look at what benefits KICs get if they qualify.
EIS Benefits for KICs
As a Knowledge Intensive Company, you can raise up to:
- £10m in EIS investment per year (instead of £5m); and
- £20m in EIS investment in your company’s lifetime (instead of £12m).
This includes money received from other venture capital schemes and state aid approved under the risk finance guidelines (double-check with the person who provided the aid for advice).
Moreover, the limit per-investor per-tax-year for Knowledge Intensive Companies is set at £2m, instead of £1m for regular EIS-approved companies.
Secondly, while typically EIS qualifying company must receive their investment within 7 years of their first commercial sales, Knowledge Intensive Companies benefit from an extension of this time period to 10 years.
Lastly, while the regular EIS rules require companies to have no more than 250 full-time employees, this threshold is doubled for Knowledge Intensive Companies, which can employ up to 500 FTEs.
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How to apply for EIS as Knowledge Intensive Company
First of all, it’s important to note that you have no reason to apply for KIC status unless you are seeking for one of the benefits involved which means one of the following:
- You are looking to raise over £5m within a year;
- You are looking to raise over £1m from the same investor;
- You started trading more than 7 years before investment;
- You employ over 250 FTE;
- You are looking to raise an amount that would bring your total funding over £12m.
In order to qualify as a Knowledge Intensive Companies, one the following requirements must be fulfilled by you and qualifying subsidiaries at the time you issue the shares:
- Be developing intellectual property that is expected to become the company’s main source of business within the next 10 years;
- More than 20% of employees hold a Master’s (or higher) degree which is functional to their role in the company, and their role involves carrying out research for at least 3 years from the date of the investment.
Additionally, your accounts must show that the following percentages of your costs have been allocated to research, development and innovation as follows:
- 10% per year for each of the past 3 years (or future 3 years if your company is less than 3 years old); or
- 15 % in one of the past 3 years (or future 3 years if your company is less than 3 years old).
Finally, you can receive investment under EIS as long as it’s within 10 years of either your:
- Annual turnover going over £200,000; or
- First commercial sale
If you have any subsidiaries, former subsidiaries or businesses you have acquired, use the earliest date among those.
If you received investment in this period (under any venture capital scheme or state aid approved under the risk finance guidelines), you can raise money for the same activity as long as you showed intent in your original business plan.