What is the 'initial investing period' ?

📘 Overview

For companies raising funds under the Enterprise Investment Scheme (EIS), understanding the time limits for receiving investment is critical. This guide explains the concept of the initial investing period, how it is calculated, and the key exceptions available.

💡 Definition

The initial investing period is the time window in which a company must receive EIS-qualifying investment.

Since 6 April 2018, KICs can start their 10-year clock when their annual turnover first exceeds £200,000, rather than relying on the date of their first commercial sale.

🔍 What Counts as a “First Commercial Sale”?

The first commercial sale is the first significant sale made by the company, excluding any test-market or trial sales.

This may not align with the date your company began trading for tax purposes. The test is based on commercial substance, not accounting recognition.

Examples of qualifying sales:

• A sale by the issuing company itself.
• A sale by a 51% subsidiary, even if it occurred before joining the group.
• A sale from a trade acquired or transferred into the company.

💡 The company’s incorporation date and the date it first raised funds do not affect when the first commercial sale occurred.

✅ Exceptions to the Initial Investing Period

Some companies may still qualify for EIS investment after their initial investing period if they meet one of the following exceptions.

1. Follow-On Funding (Condition A)

If your company received SEIS or EIS funding during its initial investing period, it may qualify for follow-on investment later, provided that:

• The new funding supports the same business activity as the earlier investment, and
• The need for additional funding was foreseen in the original business plan.

💡 For investments made before 18 November 2015, HMRC applies a more flexible approach, allowing companies to show that the follow-on investment supports the same core activities as the original round.

2. New Product or Geographic Market (Condition B)

Companies can also qualify for investment after their initial period if they are entering a new product market or new geographic market, provided that:

• The investment equals at least 50% of the company’s average turnover over the last five years, and
• The market entry represents a significant change in business activity (not a minor diversification).

💡 HMRC scrutinises Condition B carefully, as it is designed to support genuine expansion, not to bypass time limits.

📊 Financial Health Requirement

To qualify for EIS, a company must not be in financial difficulty at the time of investment.

In practical terms, this means:

• The company’s accumulated losses must not exceed half of its subscribed share capital, and
• The company must be financially viable, capable of attracting third-party investment.

For early-stage or R&D-heavy tech start-ups, losses may be high due to research expenditure. HMRC allows such companies to demonstrate that these costs could have been capitalised under UK accounting rules, which can help satisfy the financial health test.

🔗 For a deeper explanation, see our related guide: Does Financial Health Matter?

💡 What This Means for Tech Start-ups

1. Plan early: Track when your company’s first commercial sale occurred, this date starts the clock.
2. Document thoroughly: Include any anticipated follow-on funding in your initial business plan.
3. Strategise growth: If expanding into a new market, ensure your plans meet the Condition B criteria.
4. Monitor financial health: Keep clear records of R&D costs and ensure your balance sheet reflects an accurate view of your capital position.

✅ Key Takeaways