The Programme for Government explained that it would “review the taxation environment for SMEs and entrepreneurs, with a view to introducing improvements to different schemes, so that Ireland remains an attractive place to sustain and grow an existing business or to start and scale up a new business”. That environment would include the Employment Investment Incentive Scheme (EIIS). Its purpose is to encourage investments in entrepreneurial companies so that those companies can do what they do best.

Minister Donohoe said during his budget speech last year that “...as part of a continuing process of ensuring that our business supports remain efficient and responsive, my department will this year initiate an assessment of how the Employment and Investment Incentive Scheme can be enhanced in light of the impact of the current crisis”. That assessment included a public consultation putting the good, the bad and the ugly of the scheme up for discussion. That consultation ended recently and it’s good to talk.

Okay, some may question seeking additional tax incentives or improving existing ones in the middle of the Jurassic economy but to my mind that’s exactly when they’re most needed. Such a move gives innovative companies the wherewithal to live, thrive and survive. It’s in all our interests. Just look back to the 2008 crisis and that year’s second Finance Act. That brought about start up relief for companies and increased the credit for R&D credits to ensure that innovative companies could, as Rami Malek put it in the 2018 “Bohemian Rhapsody” movie, try to “punch a hole in the sky". Those changes remain in our law over a decade later.

I was privileged to attend Scale Ireland’s recent webcast event chaired by its CEO Martina Fitzgerald and its Chairman Brian Caulfield which, like many others, had just submitted their response to the EIIS consultation. Tánaiste Leo Varadkar was the keynote address. The panel comprised speakers from various technology companies but all agreed that the need to improve the regime was in everybody’s benefit, hence the requisite public consultation in the first place.

You don’t have to look very far to see favourable competitor regimes. The UK’s Enterprise Investment Scheme (EIS) is similar in approach to our EIIS. It allows qualifying companies a tax relief with a lifetime investment limit of stg£12 million combined with an annual limit of stg£5 million. Its EIS has an investor limit of stg£1 million per annum. The main differences between the UK and Irish versions comprise the much higher levels of annual investment limits applicable in the UK compared to here as well as certain more favourable aspects from a capital gains tax perspective, more on the latter in a second. The lower annual investment limits that apply here impacts the possibility of more significant funding being provided by individual investors and may also discourage longer-term professional investors.

A similar story can apply from a Capital Gains Tax (CGT) perspective. It was previously reported in these pages that a reduction in the CGT rate was mooted as part of the July stimulus package but not all parties agreed with that approach. Regular readers of this column will know my view that the rate of CGT should be reduced. As we know in 2002 when the 40% CGT rate was halved the yield on CGT increased substantially with the result that it became very clear that the rate of CGT hugely influenced its yield in a very different manner from other forms of tax. It wasn’t to be in the last Finance Bill but given where we are in the Jurassic economy, then any increased yield without increased pain on the population, is something that should continue to be considered.

But back to EIIS and CGT. If you invest in an EIIS company and it succeeds, then you pay CGT on any gain arising when you sell the shares, just as you would on any other investment. Fair enough, although the UK allows an exemption on such gains where certain Ts and Cs are met. So in Ireland there’s no discrimination between investors where a gain arises.

However, when an investor makes a loss on disposing of their investment in EIIS shares then that loss may not be an allowable loss for CGT purposes. Had that investor put his or her money or savings into a non-EIIS company and lost money on that investment then they would be allowed to use that loss in reducing other capital gains in the same or future years. Exiting an investment is just as much a consideration when considering whether to make such an investment in the first instance. How many times do we say “what’s the worst that can happen?” when making any investment decision? However, ensuring loss relief on EIIS investments would serve to reduce, but not eliminate, the element of risk when investing in such companies and by definition increase the attractiveness of such investments to would-be investors.

Another key issue mentioned at the Scale Ireland event was talent acquisition and retention by such companies. Entrepreneurs need to attract, develop and retain their own teams. This means looking at the correct incentive models and share schemes allow for that and also allow the teams to have some ”skin in the game”. That is a column in itself, but it is another factor of entrepreneurial activity that needs to form part of any review of the sector.

There are many changes that can be brought to benefit entrepreneurial activity and this column outlines just two of the changes that could be brought about for EIIS. There are more. The key point is that such companies can attract the necessary investment such that they can survive and ultimately thrive in a post-Covid world (only glass half-full approaches here, thank you!) increasing employment as they do so. It won’t be long before Budget and Finance Bill season comes around again so maybe we will see some of the above in law this time.
 

Please note this article first featured in the Business Post on 28 February 2021 and was re-published kindly with their permission on our website.