Traditionally regarded by private investors as a safe bet, The Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) funds will in future have to take greater risks. They are also being focussed on Technology Intensive Industries to provide more funding for next generation businesses. 

These significant changes appear to have gone unnoticed in the Finance Bill earlier this year. They were followed by the Chancellor announcing in the Autumn Budget the introduction of new EIS funds for Knowledge Intensive Companies. 

EIS has proved popular to investors who wish to take a low level of risk but also enjoy the benefit of the 30% tax relief the scheme provided. Now investors will need to be prepared to take higher risks with EIS focusing on early stage knowledge based businesses. 

One of the key considerations in identifying a business as a knowledge intensive company is that it has to meet 3 key criteria:

1. Spent 15% of its operating costs on innovation R&D
2. Meet the Innovation condition, namely it is in the process of creating IP
3. Skilled employees condition where 20% of the employees hold a higher Education qualification and actively get involved in the Company’s R&D.

Now some 80% of an EIS fund has to be in Knowledge Intensive Companies, and by definition higher risk enterprises. it remains to be seen if this may frighten off private investors so reducing the total amount of investment available. Non knowledge intensive companies may also suffer too  from the new focus despite these businesses also needing much needed risk capital.