What was clear from the Government’s recent Patient Capital Review, which brought the curtain down on low-risk asset-backed EIS, was that many so called knowledge-intensive (KI) companies are struggling to obtain the capital they need to grow. The term knowledge-intensive captures companies with a focus on IP commercialisation and who meet one or more tests as to R&D expenditure or employ skilled personnel with postgraduate qualifications. Although investments in such companies carry a significantly higher risk, it is widely acknowledged that KI companies can offer value in terms of job and wealth creation. As a result, the Government is working to incentivise investors to focus more on this sector and to strengthen the entrepreneurial culture of the UK.

In announcing its plan to unlock £20 billion of investment over the next ten years, with the aim of supporting young and innovative companies by closing the long-term capital gap, the Government intend on building a new EIS fund structure that will focus almost exclusively on investments in KI companies (with possible scope for 10-20% of investments to be in non-KI qualifying companies).

The previous incarnation of the approved fund structure was rarely taken up by managers who found the benefit of a single EIS5 form and tax reliefs being granted in the year of investment in the fund outweighed by the restriction to a single closing and the requirement to invest 90% of funds raised within 12 months in a spread of at least four companies.

Any new fund model is anticipated to be subject to HMRC approval, ensuring HMRC has adequate oversight of the fund. This would place a compliance obligation on fund managers, although the extent of this obligation “would depend on the incentives attaching to the fund”. Industry views on which incentives would best attract long-term, high-risk investment into KI companies are being sought.

Options include:

• Dividend tax exemption which could be applied in respect of investments made through a KI fund after a fixed holding period (though it was noted that whilst this may encourage patient investments, it also carries risk that companies could be pressured into issuing dividends instead of reinvesting profits made);

• capital gains tax relief on reinvestment into a KI fund (providing a more concrete incentive for reinvestment than the current deferral option); and

• extended carry-back of tax relief for investors in a KI fund.

Naoise Tan, RW Blears LLP