During 2018 there were growing calls for the Employment and Investment Tax Incentive (EIIS) to be overhauled. The frustration being voiced by entrepreneurs and investors stemmed from issues such as the lack of available finance, delays in obtaining EIIS approval and a rigid interpretation of State Aid rules.
Pressure from investors and companies seeking funding resulted in the Government commissioning a report from Indecon Consultants which sought to evaluate Ireland’s EIIS (and SURE) relief. On foot of this report a number of changes were made to these reliefs in the 2018 Finance Act.
The EIIS allows individuals to reduce their income tax bill on a staged basis over a four year period. The main features of the relief are as follows:
- The maximum annual relief for an investor is €15ok and any unused relief may be carried forward to future years,
- The investor must hold the shares for a minimum of four years,
- The fundraising limit for companies is €5m annually, with a €15m lifetime limit, and
- The company must carry on a “qualifying trade”. Most trades should qualify but there are certain exceptions (e.g. dealing in shares, financing activities, dealing in development land etc).
We deal with many SMEs, some of which are start-up and scaling companies, and have found that the following are the key issues that impact them on a practical level when it comes to the EIIS, including:
- Self-certification: Budget 2019 introduced a self-certification process for EIIS relief claims. Although this should make the process more efficient, it does give rise to an element of risk as companies are in effect underwriting whether or not the company qualifies for EIIS.
- Timing of funding: First rounds of funding will only qualify for EIIS if received within 7 years of the commencement to trade. For second or subsequent rounds of funding, the fundraising must be envisaged in the company’s original business plan. Careful drafting of your business plan is therefore critical.
- Investments from related parties: Investments in companies controlled by relatives may no longer qualify for EIIS. However, as an alternative is may be possible to claim the new Start-Up Capital Incentive (“SCI”). The SCI is similar to the EIIS in many ways but the qualifying investment is capped at €500k.
- Personal holding companies: Personal holding companies potentially have a number of tax/commercial advantages for founders/investors. They can, however, cause issues for EIIS relief where the founder/investor holds a controlling shareholding (via, for example, their personal holding company) in the company seeking to qualify for EIIS.
- SURE (“Start-Up Relief for Entrepreneurs”) relief: Although it has not been that widely used, SURE relief can be a useful source of finance where an individual leaves PAYE employment to start their own business.
The changes in the 2018 Finance Act, which implemented some of the recommendations in the Indecon Report, were broadly welcomed by practitioners. While it is still early days these changes have the potential to simplify the application process and reduce delays in the processing of claims.
It is worth noting that there was another public consultation on the EIIS scheme earlier this year. This was a positive development because it might help improve the scheme. For example, the annual €150k investment limit available under EIIS should be increased to a level closer to €1m to compete with the equivalent relief in the UK. Similarly, full EIIS relief should be given to investors in the year of investment rather than the current phased system (75% relief in year of investment and 25% balance in year 4).
It is interesting to note that according to Revenue statistics, funding raised under the EIIS in any single year has yet to exceed the amount raised under the “old” BES scheme in 2008. This is despite the gradual relaxing of the EIIS legislation and the increase in investor sentiment in recent years. Hopefully changes will be made to the EIIS in the 2020 Budget to make the scheme more attractive so that SME’s can get access to much needed finance. Time will tell!