Venture Capital Schemes for Knowledge-Intensive Companies

Introduction

If your company is focused on research, development, or innovation, you may qualify as "knowledge-intensive" under the Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) rules. This classification allows you to raise significantly more investment — up to £20 million per year instead of the standard limits — and gives your company and investors access to enhanced tax reliefs.

What is a knowledge-intensive company?

A knowledge-intensive company is one that carries out substantial research, development, or innovation activities. The government created this designation to encourage investment in cutting-edge businesses that develop new intellectual property or employ highly skilled research staff.

The enhanced limits recognise that these companies often need more capital to reach commercialisation than traditional businesses.

When to apply as knowledge-intensive

You only need to apply as a knowledge-intensive company if:

• You need to raise more money than the standard EIS or VCT limits allow
• Your company is older than normally permitted under these schemes
• Your investors want to take advantage of the higher individual investment limits (up to £2 million under EIS, provided at least £1 million goes into knowledge-intensive companies)

If none of these apply, you can use the standard venture capital schemes with their usual limits and may find the application process simpler.

Basic eligibility requirements

Before checking if you qualify as knowledge-intensive, your company must meet the standard EIS conditions and be carrying out research, development, or innovation at the time you issue shares.

Additionally, it must be within 10 years of either your:

• First commercial sale, or
• Annual turnover exceeding £200,000

Use the earliest date across your entire group if you have subsidiaries, former subsidiaries, or have acquired other businesses.

The knowledge-intensive qualification test

To qualify as knowledge-intensive, your company and any qualifying subsidiaries must have fewer than 500 full-time equivalent employees when the shares are issued.

You must also meet either of these two conditions:

Condition 1: Intellectual property creation

Your company must be working to create intellectual property and expect that the majority of your business will come from exploiting this intellectual property within 10 years.

Condition 2: Research staff requirement

At least 20% of your employees must be carrying out research and development for at least 3 years from the date of investment. These employees must hold roles that require a relevant Master's degree or higher qualification.

Operating costs requirement

Beyond meeting one of the two conditions above, you must also satisfy spending requirements on research, development, or innovation as a proportion of your overall operating costs.

You must meet either:

• 10% of operating costs per year for 3 consecutive years, or
• 15% of operating costs in one of any 3 consecutive years

If your company is at least 3 years old: You must have met this requirement in the 3 years before the investment.

If your company is less than 3 years old: You must meet this requirement in the 3 years following the investment. You'll need to submit a schedule supported by accounts to demonstrate compliance.

How much you can raise

Most knowledge-intensive companies can raise significantly more than standard companies:

• Up to £20 million in any 12-month period
• Up to £40 million over the lifetime of your company and any subsidiaries

These limits include amounts received from other venture capital schemes and state aid approved under the risk finance guidelines.

Specified companies (Northern Ireland)

Some knowledge-intensive companies have lower limits if they are "specified companies." This applies to companies with a registered office in Northern Ireland that carry on a trade in goods (usually manufacturing, not services or wholesale electricity activities).

Specified companies can raise:

• Up to £10 million in any 12-month period
• Up to £20 million over the lifetime of the company and any subsidiaries

What about previous investments?

If you received investment during the 10-year qualifying period under any venture capital scheme or state aid, you can still raise money for the same activity — provided you demonstrated this intent in your original business plan.

Applying for knowledge-intensive status

When you've issued shares to investors, you'll need to complete a compliance statement and provide evidence as part of your EIS application.

You can ask HMRC for advance assurance (an opinion on whether your proposal is likely to qualify) before issuing shares, but HMRC will only give an opinion on your knowledge-intensive status if you need to raise more money than standard scheme limits allow.

You must check that you meet all the conditions of the chosen scheme before seeking advance assurance.

Why this matters for your investors

The enhanced limits benefit your investors too. Under EIS, investors can normally invest up to £1 million per tax year. However, they can invest up to £2 million if at least £1 million of that amount goes into knowledge-intensive companies.

Your company must follow all scheme rules carefully so that investors can claim and keep the tax reliefs relating to their shares. If you fail to maintain compliance, your investors could lose their tax reliefs, which would damage your ability to raise future funding.

Sources

• Use a venture capital scheme to raise money for your knowledge intensive company

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.