VCM8163 - Venture Capital Schemes: knowledge intensive companies: the operating costs conditions

The operating costs conditions

The first operating costs condition is that the company must have spent at least 15% of its relevant operating costs on research and development or innovation in one of the three relevant years preceding the date of the investment.

The second operating costs condition is that the company must have spent at least 10% of its relevant operating costs on research and development or innovation in each of the three relevant years preceding the date of the investment.

Where the company is the parent company of a group of companies the relevant operating costs to be taken into account include the costs of any subsidiary of the company at the time of the investment.

Start-up companies

The operating costs conditions are modified to enable start-up companies, those that started to trade less than three years before they issue the shares or securities, that intend to become knowledge intensive to benefit from certain of the thresholds that are higher for established knowledge-intensive companies. The higher thresholds for which these modified operating costs conditions apply are:

• The £2 million investment limit for individuals investing under the EIS
• The £10 million maximum amount of relevant investments a company may receive in any 12 months.

The first operating costs condition is that the company must spend at least 15% of its relevant operating costs on research and development or innovation in one of the three years following the date of the investment.

The second operating costs condition is that the company must spend at least 10% of its relevant operating costs on research and development or innovation in each of the three years succeeding the date of investment.

Where the company is the parent company of a group of companies the relevant operating costs to be taken into account include the costs of any subsidiary of the company at the time of the investment.

Where the company’s accounting period differs from the date of the investment, it will need to apportion its costs to each of the three 12 month periods following the date of the investment.

At the end of the three year period (or earlier if the company relies upon meeting the first operating costs condition in one of the first two years) the company should submit a schedule, supported by accounts, to the VCR Team demonstrating how it has met at least one of the operating costs conditions. If the company has not met one or more of the operating costs conditions any tax relief will be withdrawn, or the company will become a non-qualifying investment.

When demonstrating that it meets one or more of the operating costs conditions, the company should not rely upon nominal amounts of expenditure. The operating costs taken into account should include the money raised by the company through its EIS or VCT investments.