HM Treasury has published ‘Financing growth in innovative firms: Enterprise Incentive Scheme knowledge-intensive fund consultation response’ and in response will introduce a new EIS fund structure.

Respondents to the consultation, ‘Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund’, have identified the difficulties faced by Knowledge-intensive companies (KICs):

  • Although start-up capital supplies are good due to the benefits offered by EIS there is a gap in later stage funding.
  • Knowledge-intensive companies have long product development periods and require large amounts of capital to get products to market and there is a lack of sufficient trading record to source follow on funding easily.
  • There is typically a relatively long length of time required before investors receive a return.

Respondents suggested that dividend tax exemptions would not make them more attractive as often there are many years before dividends can be issued.

The government has agreed that there should be no dividend exemption or CGT write-off. The focus should be on funding KICs and enabling them to reinvest their profits into business growth rather than pay out profits as dividends.

In response to the consultation the government has decided that the Approved EIS Fund structure should be reformed from April 2020 and target KICs. The structure enables individuals investing in EIS shares via an approved fund to benefit from income tax advantages.

Under the proposals EIS funds will have to:

  • Invest at least 80% of funds raised in KICs.
  • Make the investments within 2 years of the fund raise, 50% of which should be invested within 12 months. This is an extension to the existing rules.
  • Submit annual statements to HMRC to show compliance.

A carry back rule will be introduced to enable investors to set relief against income tax liabilities in the year before the fund closes.

The current fund structure will be withdrawn at the same time to avoid complication.

Legislation will be included in the Finance Bill 2020.

Links

EIS: Enterprise Investment Scheme (Subscriber guide)

Knowledge-intensive companies

Financing growth: EIS knowledge-intensive fund consultation

Budget 2018: Summary for Individuals & Businesses

External link

HMRC: Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund consultation response

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