What is a Knowledge Intensive Company (KIC)? EIS benefits and criteria

Knowledge Intensive Companies (KICs) are companies that are carrying out research, development or innovation at the time they are issuing shares. They have a special status under HMRC’s Enterprise Investment Scheme (EIS) which means they can raise more EIS investment, more flexibly, than non-KICs.

In this post, we cover the different EIS limits for KICs and explain when and how to apply.

• KIC benefits: raise more in EIS funding, for longer
• KIC criteria
  – The innovation condition, and the skilled employee condition
  – The operating cost condition
• How to apply for KIC status
  – The evidence you need
• Key KIC takeaways
• Talk to the experts

KIC benefits
KICs can raise more in EIS funding, for longer

Under EIS, investors get various forms of tax relief as an incentive to support early-stage businesses. The goal of this scheme is to encourage the growth of innovative companies, so that they can succeed, go on to provide jobs and power the UK economy.

Companies that are ‘knowledge intensive’ get extra support under EIS. KICs can raise more money under EIS, for longer, to compensate for the money, effort, and risks they take creating new IP and fuelling innovation.

As a KIC, you can raise up to £10M in a year, £20M in total

There are limits to the amount of EIS funding you can raise in a year and over the total lifetime of your company. As a KIC, you can raise:

• £10 million in EIS investment per year (the standard EIS limit is £5 million)
• £20 million in EIS investment over your company’s lifetime (the standard EIS limit is £12 million)

Individual investors can claim tax relief on investment up to £2M

Investors can claim more in EIS tax relief when they invest in KICs. Usually, the total amount an individual can invest and claim EIS tax relief on is £1M per tax year.

But, as long as the investor puts £1M towards KICs, they can invest £2M in a tax year across EIS-eligible businesses and claim tax relief.

KICs can raise EIS funding for 10 years

Companies only have a limited window in which they can fundraise with EIS. It’s usually seven years from the date of your first commercial sale. As a KIC, you have 10 years.

KICs can have up to 500 full-time employees

KICs can have a maximum of 500 full-time employees, whereas other types of companies must have no more than 250 full-time employees.

KIC criteria
Working to create intellectual property? You might be a KIC

If you’re already working on product development, or raising funding so that you can work on product development, you might qualify as a KIC.

As set out in the government’s rules, at the time of the investment a Knowledge Intensive Company must meet:

• either the innovation condition or the skilled employees condition

and

• the operating cost condition

The innovation condition, and the skilled employee condition

To get the extra KIC benefits, at the time of issuing the EIS shares your company must meet either:

• The innovation condition: you must be creating or using IP to develop a product (or products) that you intend to become the company’s main business within the next 10 years

or

• The skilled employee condition: you must have 20% of your full-time workforce qualified at Master’s level or above, carrying out research in a role that requires their academic expertise. This work needs to continue for at least 3 years from the date of the investment

To see what documents you need to submit to prove you meet either condition, jump down to the section on the evidence you need for your KIC application.

The operating cost condition

There are also rules specifying how much of your overall operating costs you spend on research, development or innovation. These rules depend on how old your business is.

If your company is three years old or older

You must have spent (at least) the following percentages of your operating costs on research, development or innovation:

• 10% a year in each of the past 3 years before you take the investment
• Or 15% in 1 of the past 3 years before you take the investment

If your company is less than 3 years old

You must spend (at least) the following percentages of your operating costs on research, development or innovation:

• 10% a year in each of the next 3 years after you take the investment
• Or 15% in 1 of the next 3 years after you take the investment

How to apply for KIC status

KIC status isn’t use-it-or-lose-it. You can raise as normal under the SEIS and EIS schemes and only get certified as a KIC at the point where you need the extra flexibility.

In general, HMRC won’t confirm on a speculative basis whether they’ll accept your KIC status. Instead, they’ll only consider your KIC application at the point where you have a specific investment on the line that falls outside the usual EIS limits.

The evidence you need for your KIC application

As part of a KIC application, you will need to submit proof of how you meet the innovation/skilled employee condition and the operating cost conditions.

The evidence you need to show includes:

• Innovation condition
  • If the IP you are relying on is in development, you need to submit business cases, progress reports and applications for trademarking or patents
  • If you’re in the early stages of development of the IP and don’t have the evidence above yet, you need to obtain a written evaluation of the company’s activities from an independent expert. The evaluation must support the company’s expectations that within 10 years its main business will be based on the exploitation or use of the intellectual property it will be creating
• Skilled employee condition
  • You need to provide copies of the Masters or Doctorate degree certificates of your employees to support your application
• Operating cost condition
  • To prove you meet these, you need to submit a schedule prepared by your accountant, showing the expenditure on R&D in the previous 3 years
  • Company accounts that support the above expenditures

Finally, to tie it all together, you should write a separate letter explaining how you meet these conditions.

If you apply for Advance Assurance through SeedLegals, our specialist team reviews all your documentation to help you build the best case possible for KIC approval.

Key KIC takeaways

• Knowledge Intensive Companies can raise more EIS funding
  and have more flexible limits on the age and size of the company
• To qualify, you must meet all the normal EIS requirements
  and spend a % of total operating costs on research and development
• You don’t need to apply in advance to lock in KIC status
  and when you do need it, you can submit a new Advance Assurance application

Talk to the EIS experts

Questions about the KIC criteria? Or what you need for your Advance Assurance application? Choose a time to speak to the SeedLegals team, and we’ll help you get your EIS sorted.