EIS vs Knowledge Intensive Funds

Suppose investors use EIS investments’ Carry-Back facilities against income tax liabilities relating to the previous tax year. In that case, they must ensure the capital is deployed in the current tax year. Similarly, deployment must be within that timescale if investors use EIS investments to defer a capital gains tax bill crystallised in the last three years.

With many EIS funds advertising that they can take up to 12-18 months to deploy capital, there are two potential remaining options for ensuring your client can utilise Carry Back;

  • Conventional EIS – Invest in a monthly deployment target EIS fund
  • An approved Knowledge Intensive EIS Fund (KIF)
Below, we aim to compare the pros and cons of both options.

Deployment Timescales

Conventional EIS

This allows funds to be deployed across a portfolio of companies and (importantly for HMRC purposes) shares to be issued by 5th April.

Knowledge Intensive EIS Fund(s)

These funds will typically close on the 5th of April, which for KIFs is an essential date for HMRC purposes.

Investment Horizon

Conventional EIS

When money is deployed, investment managers support portfolio companies in scaling when your clients’ cash starts working.

Knowledge Intensive EIS Fund(s)

Some KIFs advertise that it may take up to 12-18 months for capital to be deployed and start working. Meanwhile, this will be held as cash.

Carry Back

Conventional EIS

Investments will be eligible for carry-back subject to capital being deployed and shares allotted, as planned, by 5th April.

Knowledge Intensive EIS Fund(s)

If the KIF closes as planned by the 5th of April, investments will be eligible for Carry-Back.

Timescale to Claim Tax Reliefs

Conventional EIS

With funds deployed by 5th April, it usually takes 8-12 weeks (although this can take longer and is not guaranteed) for HMRC to process ESI3 certificates. Upon receipt of the certificates, investors can claim tax relief—no spending requirements before the EIS3 is produced.

Knowledge Intensive EIS Fund(s)

A single EIS5 certificate is expected to be issued after the fund has invested 90% of its capital, which it must do within 24 months of closing. Upon receipt of the certificate, investors can claim tax relief.

Tax Certificates

Conventional EIS

One EIS3 will be provided per EIS qualifying company. These will typically be stored online on behalf of investors.

Knowledge Intensive EIS Fund(s)

A single EIS5 certificate is produced, covering all investments.

Investment Focus

Conventional EIS

The investment focuses on companies operating in industries such as Technology. The stage of the companies (very early to later stage) and target customers (B2B or B2C) depend on the fund manager’s investment strategy. Diversification within the fund is encouraged, but this may depend on the investment amount and fund selection criteria.

Knowledge Intensive EIS Fund(s)

A fund must meet specific conditions HMRC sets to qualify as a KIF EIS fund. These include that 80% of its investments must be in ‘Knowledge Intensive’ companies and that there must be a minimum of four companies, as defined by HMRC. These are companies carrying out research, development, or innovation and creating highly skilled jobs at the time of the investment.

Restrictions

Conventional EIS

There are no restrictions for conventional EIS investing in Knowledge Intensive Companies.

It is preferable to investors that fund managers seek HMRC Advance Assurance before fund deployment, and all companies must meet our rigorous investment criteria. The ongoing management of qualifications should remain a priority for fund managers. Regular communication of EIS qualification may be shared with investors frequently to provide additional reassurance.

Knowledge Intensive EIS Fund(s)

KIFs must invest 50% of their capital within 12 months of the fund’s closing date and 90% within 24 months of the fund’s closing date. Within those 24 months, at least 80% of the fund’s capital must be invested in the shares of companies that were knowledge-intensive when the shares were issued.

The fund manager must provide HMRC with full details of all investors and their investments.

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