Trading For Seven Years Or More: How To Utilise Knowledge Intensive Company Status To Extend The EIS Investment Period

Byron Yeung February 21, 2024

What is a KIC?

The Enterprise Investment Scheme (“EIS”) was created to incentivise individual investors to invest in qualifying early-stage companies by allowing an investor to take advantage of tax reliefs on their EIS-qualifying investments. A knowledge-intensive company (“KIC”) carries out research, development, or innovation activities, which necessitates increased spending and greater flexibility than non-KICs. This is reflected in the broader EIS eligibility criteria that KICs benefit from compared to non-KICs, including:

being able to raise up to £10m per year pursuant to EIS (rather than up to £5m per year);
the ability to raise up to £20m over its lifetime (rather than up to £12m);
a KIC can raise EIS funding over 10 years (rather than 7 years); and
investors can claim EIS tax relief up to £2m per year (rather than up to £1m per year) when investing in KICs.

This article explores the 10-year investment in more detail. The above is only a snapshot of the differences between KICs and non-KICS. There are further conditions that a company must satisfy to qualify as a KIC. If you would like to find out more information to determine whether your company may qualify as a KIC, please read our detailed article on the qualifying criteria of KICs.

If you are approaching the end of your 7-year investment period or the lifetime funding limit of EIS, it is always worth exploring whether KIC could be applicable. The receipt of KIC status can create a more attractive investment opportunity for the later investment rounds.

10-year investment period

A company has a limited timeframe to raise money pursuant to EIS. For non-KICs, the deadline is 7 years from the date of the company’s first commercial sale. The rationale behind this is that EIS is meant to encourage investment in early-stage companies and HMRC consider that a 7-year-old company should be able to self-fund via existing trade or raise investment without the incentive of EIS tax relief, i.e. due to an established trading history.

For KICs, the 10-year EIS qualifying investment period starts from either:

the date of the company’s first commercial sale; or
the date on which the company’s annual turnover exceeds £200,000.

The investment window is longer than the standard 7 years as KICs require additional time and funds to carry out research, development, and innovation activities. This means that if your company is outside of the 7-year window, you may be able to raise investment pursuant to EIS if you can obtain KIC status.

Importantly, a KIC can determine a date later than the first commercial sale, i.e. the date on which the company’s annual turnover exceeded £200,000. This means that not only does a KIC benefit from a longer investment period (10 years), but also that the investment period can begin at a date later than non-KICs.

First commercial sale

The first commercial sale is defined as “the first sale by an undertaking on a product or service market, excluding limited sales to test the market.” This will usually be the date that a company starts to trade. This means that using the date on which the company’s annual turnover exceeds £200,000 as the start of the 10-year window provides a more generous time frame to raise investment pursuant to EIS.

Where a company is part of a group of companies, the first commercial sale is deemed to be the earliest possible date that any of the companies in the group made its first commercial sale, regardless of whether the companies are carrying on different activities.

£200,000 turnover threshold

The threshold is met when a company’s turnover exceeds £200,000 within a 12-month period. HMRC offers some guidance on how to calculate and determine the date on which the turnover threshold is met:

Where a company’s accounting period is not 12 months, the turnover of the company will be apportioned to reach an annualised turnover for the purpose of determining when the company’s turnover exceeded £200,000.
Where a company’s accounting period is 12 months or less, the last day of the accounting period is the date on which the company’s turnover is deemed to have reached £200,000.
Where a company’s accounting period is longer than 12 months, the date 12 months after the start of the accounting period is the date on which the company’s turnover is deemed to have reached £200,000.
When calculating the turnover of a company, the turnover of any of its subsidiaries is included.

How can we help?

If you are interested in submitting an EIS advance assurance application pursuant to KIC status or you would like to explore whether KIC would be applicable, we offer a no-cost, no-obligation 20-minute introductory call as a starting point. Please email wewillhelp@jonathanlea.net providing us with any relevant information ensuring that any call we have is as productive as possible. After this call, we can then email you a scope of work, fee estimate, and confirmation of any other points or information mentioned on the call.

This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited 2024.