Several enhancements to the Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) were announced as part of this year’s Budget. Here, Richard Turner, Managing Director for Tax and Innovation at FTI Consulting, gives his view on the latest SEIS/EIS consultation.
You can see our response to the previous consultation here and also our press release mentioning this point in response to the Budget statement here. If you are interested in inputting to the latest consultation, please get in touch with Pamela Learmonth.
This year’s Budget announced several enhancements to the Seed Enterprise Investment scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). On balance the changes are positive. For Life Science companies the transition between SEIS and EIS will now be smoother and new thresholds will favour knowledge intensive companies that should apply to most companies in the sector. The draft legislation did not appear within the Finance Bill but was published as a separate document on the 24th March, available here.
In summary the new legislation, which remains subject to State Aid approval, will:
- increase the employee limit for ‘knowledge-intensive’ companies to 499 employees, from the current limit of 249 employees;
- remove the requirement that 70% of the funds raised under SEIS must have been spent before EIS or VCT funding can be raised;
- limit initial EIS or VCT investment to companies whose first commercial sale took place within the previous 12 years except where the investment will lead to a substantial change in the company’s activity;
- introduce a cap on total investment received of £15 million, increasing to £20 million for ‘knowledge-intensive’ companies.
This is largely good news but it brings with it a raft of new definitions and the odd tripwire. Believe it or not, many advisers would wish dearly to answer a simple question such as ‘will the company qualify for EIS status’ with a resolute ‘yes’ or ‘no’ but, unfortunately, the checklist gets ever longer.
By way of illustration, the definition of a ‘knowledge-intensive’ company requires it to satisfy one or both of two ‘operating costs conditions’ in addition to one or both of the new ‘innovation condition’ or the ‘skilled employee condition’. Broadly speaking, to satisfy the ‘operating costs conditions’ at least 15% of the company’s operating costs must be attributable to R&D in one of the preceding three years or at least 10% in all of the three preceding years. The ‘innovation condition’ is that the company must be engaged in IP creation and the ‘skilled employee condition’ is that at least 20% of full-time employees are ‘skilled’ whether that be a single company or within a group.
Perhaps understanding and learning the definition of a knowledge-intensive company should be enough to satisfy the condition in its own right.
The draft legislation introduces eight substantially new definitions including new concepts such as; the ‘FTE group skilled employee number’, a ‘relevant HE qualification’ and an ‘independent expert.’ This can all be worked through and, in most cases, the final answer will be the same as an intuitive guess.
It is unlikely that many life sciences companies will be caught by the 12 year rule due to the simple fact that most will not yet be making commercial sales. It is also important to note that the 12 year rule only applies to the first EIS of VCT investment. If the test is passed on the first round, follow-on funding will not be caught.
Notwithstanding these grumbles, the incentives remain highly attractive and worthwhile, but for those companies wanting to benefit from them on a recurring basis, here are four tips:
- Set out all the qualifying criteria
- Document the basis on which you satisfy each one
- Set out all the reasons why qualification might be withdrawn
- Keep it handy and check it every few weeks
This way, the details will become less intimidating and the incentive should hopefully continue to drive new investment.