Insights

Are We Doing Enough to Encourage Private Investment?

Introduction

With bank lending so restrictive for SMEs and start up companies many are turning to private investment to raise funds.  Investment by the large venture capital funds will not be possible or indeed appropriate for many businesses.  This is the gap that the  Employment and Investment Incentive Scheme (EIIS) was intended to fill.  However, it is questionable whether it does enough to really incentivise investors particularly when compared with its UK counterpart.  We take a look at both schemes below to examine where the Irish Scheme falls short.

EIIS was introduced in 2011 as a successor to the BES scheme.  As the name would suggest the purpose of the EIIS was to create employment ad incentivise investment into the SME sector by providing tax relief on the investment. 

The EIIS broadly follows the format of the equivalent UK scheme, the Enterprise Investment Scheme (‘EIS’). However, the UK EIS offers additional reliefs that make the UK scheme a much more attractive proposition than the Irish one as evidenced by its popularity in comparison to the Irish scheme.

Ireland - EIIS UK - EIS
Eligible Companies
Most SME’s are eligible to avail of the scheme as long as they are unquoted and resident in the EEA but carrying on business in Ireland.  There are a number of exceptions such as professional services, financial activities and the operation of hotels, accommodation or guest houses unless they meet certain criteria. The exclusion on nursing homes from eligibility has been removed as of Budget 2016. The company must have a permanent establishment in the UK during the investment period.  It does not necessarily have to be a UK registered company and therefore the scheme may be available to Irish companies who carry on a qualifying trade in the UK.

As with Ireland the company must not be a quoted company.  However, for the EIS rules the Alternative Investment Market and the PLUS Markets (with the exception of PLUS-listed) are not considered to be recognised exchanges, so a company listed on those markets can raise money under the EIS if it satisfies all the other conditions.
Amount of Investment Permitted
A company can raise up to €5,000,000 per annum in this manner subject to a cap of €15,000,000 (increased from €2,500,000 per annum and a cap of €10,000,000 in the 2016 budget). A Company can raise up to £5,000,000 per annum from venture capital schemes.
Format of Investment
Investment must be in the form of new ordinary share capital in the company held for 4 years (increased from 3 in budget 2016) and there must be no condition which would eliminate the risk to the investor i.e. there can be no security given or preferential return on investment.   As with EIIS the UK EIS investment must be for full risk ordinary shares which do not carry preferential rights to assets on a winding up. There are some additional clarifications as to what this means in the case of the UK scheme.  Shares may include limited preferential rights to dividends.  Shares may not be acquired by using a loan.  No reciprocal arrangements between company owners to obtain relief are permitted. There can be no arrangements to protect the investor from the normal risks associated with investing in shares.  The shares must be held for a period of 3 years.
Tax Relief
An investor can 30% income tax relief on investments of up to €150,000 per annum. A further 11% relief is available if it can be demonstrated that employment levels have increased at the company at the end of 3 years or where it is shown that the company used the investment for R&D.

Income Tax relief

30% relief is available up to a maximum of £1,000,000 invested. The UK has a ‘carry back’ facility which permits all or part of the cost of shares acquired in a particular year to be treated as thought they were acquired the previous year.

Capital Gains Tax Relief

Where an investor has received income tax relief on the cost of acquiring the shares, such investor is also entitled to relief from CGT on the disposal of the shares provided they have been held for the requisite period.

Loss Relief

If eligible shares are disposed at a loss, the investor can elect that the amount of loss, less income tax relief obtained, can be set off against income of the year in which the shares are disposed.


Summary

Criteria Irish EIIS UK EIS
Investment Term 4 years 3 years
Eligible Investor Resident in Ireland during relevant tax year
Relief Available 30% + 11% Income Tax

30% Income Tax

CGT Relief

Loss Relief
Maximum annul investment  by investor €150,000 £1,000,000
Eligible Companies Most SME’s subject to minimal exemptions Most SME’s subject to minimal exemptions
Maximum annual amount raised by Company €5,000,000 £5,000,000
Maximum lifetime cap for Company €15,000,000 n/a
Share class permitted Ordinary shares with no preferential return Ordinary shares with no preferential return on winding up but limited preference on dividend


Conclusion

While the EIIS was a welcome replacement to its predecessor the BES, when compared with its UK equivalent it falls short.   By removing any tax on the potential gain and the and allowing relief on potential loss, the UK scheme will appeal to a broader range of potential investors.  Investments in EIIS here are relatively low by comparison to the UK and one must wonder if the government has missed a trick by not introducing similar reliefs to those in the UK to reduce the risk associated with investments and thereby increase the amount of investment.

For further information on this topic, please contact Elaine McGrath at emcgrath@reddycharlton.ie


Keywords: Publication, Corporate Transactions, Investment in Ireland, Elaine McGrath, Probate and Private Client

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