The innovation condition
A company will meet the innovation condition if it is engaged in carrying out work to create intellectual property at the time when the investment is issued and that it is reasonable to assume that within 10 years of the investment most of the company’s or group’s business activities will consist of
- the exploitation of that intellectual property or
- business which uses the intellectual property
- or both.
Companies can work with others to create the intellectual property. However in all cases the greater part by value of the intellectual property must be created by the company and the company must retain the right to exploit the intellectual property it creates whether alone or jointly with others.
Where a company is the parent of a group the innovation condition applies to the group as the whole and the group’s business activities must largely depend upon the exploitation or use of the intellectual property.
Evidence required for meeting the innovation condition
In many cases the company will already have created intellectual property or be carrying out work to create intellectual property and will have documentary evidence to show it is developing an idea, for example, business cases, progress reports and applications for trademarking or patents. If the intellectual property has already been created at the time of the investment, that intellectual property must have been created within the preceding three years.
If a company is in the early stages of development it may not have the evidence to show this is the case. In that case it will need to obtain a written evaluation of the company’s activities from an independent expert. The evaluation must support the company’s expectations that within 10 years its business will be based on the exploitation or use of the intellectual property it will be creating.
An independent expert is an individual who is
- not connected with the issuing or relevant company in any way
- holds a relevant higher education qualification
- an expert in the area of research and development or innovation.
An individual is connected with the issuing or relevant company if he or she meets the conditions in ITA07/S167 to 171 (excluding section 168). See VCM 11050, 11060, 11080-11100:
Note that all directors are connected with a company for the purposes of determining if an individual is an independent expert, whether or not section 168 would normally apply for EIS purposes.
A relevant higher education qualification is a Master’s degree or higher.
The company will need to provide evidence to show the individual is an expert in their field, for example, citations in academic papers.