What is the 'initial investing period' ?
For companies looking to secure funding through the Enterprise Investment Scheme (EIS), understanding the rules on the time limits for receiving investment is crucial. Here’s a simplified breakdown of the rules, key definitions, and exceptions to help navigate this complex landscape.
What Is the Initial Investing Period?
The initial investing period refers to the time frame during which a company must secure EIS investment to qualify under the scheme. For most companies, this period ends seven years after the company’s first commercial sale. However, knowledge-intensive companies (those focused on R&D or innovation) get 10 years.
From 6 April 6 2018, knowledge-intensive companies can start their 10-year clock when their annual turnover exceeds £200,000 instead of relying on the date of their first commercial sale.
What Is a First Commercial Sale?
The first commercial sale is the first significant sale a company makes, excluding test-market sales. This doesn’t always match the start of the company’s trade for tax purposes—it’s a separate consideration.
It’s essential to include sales from subsidiaries or trades that were acquired or transferred to the company. Here are examples of what counts as a first commercial sale:
- A sale by the issuing company itself.
- A sale by a 51%-owned subsidiary, even before it joined the group.
- A sale from a previously acquired or transferred trade.
What doesn’t matter? The company’s incorporation date or when it first raised funds doesn’t affect this definition.
Exceptions to the Initial Investing Period
Some companies may qualify for EIS funding after their initial investing period if they meet one of the following exceptions:
1. Follow-On Funding (Condition A)
If a company raised funds under SEIS or EIS during its initial period, it may qualify for follow-on funding later. However:
- The funding must support the same activity as the original investment.
- The need for follow-on funding must have been foreseen in the original business plan.
For investments made before 18 November 2015, HMRC takes a more flexible approach, allowing companies to show that follow-on funding supports the same activities as the initial investment.
2. New Product or Geographic Market (Condition B)
If your company is entering a new product market or geographic market, it may still qualify for investment after the initial period, provided:
- The investment is at least 50% of your company’s average turnover over the last five years.
- The market entry represents a significant change in your business, not just a small shift.
This exception aims to help companies pivot in a meaningful way but is not a workaround for the time limits. HMRC evaluates this rigorously.
Financial Health Requirement
To qualify for EIS investment, your company must not be considered “in difficulty.”
In simple terms, this means:
- Your company’s losses must not exceed half of its subscribed share capital.
- HMRC evaluates whether your company can still attract outside investment or whether it is financially viable.
For many tech start-ups, R&D expenses may have created significant losses. In such cases, HMRC allows companies to demonstrate that their R&D costs could have been capitalized under UK accounting rules, which can improve their financial health standing.
For more information on this requirement, please see our related guide 'does financial health matter?'
What This Means for Tech Start-Ups
- Plan Early: Understand when your company’s initial investing period starts and ends.
- Document Thoroughly: Make sure your business plan includes potential follow-on funding needs if applicable.
- Consider Your Growth Strategy: If you’re planning a significant market expansion, ensure you meet the criteria for Condition B.
- Track Finances Carefully: Keep clear records of R&D expenses and consult with an advisor to ensure your financial health aligns with HMRC’s requirements.
Final Thoughts
EIS can be a game-changer for securing funding in the start-up world, but the rules are detailed and strict. Working with a tax advisor can ensure you make the most of the scheme without falling foul of the regulations.
This article simplifies the main points, but please do seek our advice in relation to your company’s unique situation.