Friday 18 October 2019

Radical overhaul sought for EII funding scheme

Case studies highlight how issues with the scheme have been hurting SMEs, writes Samantha McCaughren

Finance Minister Paschal Donohoe recently appointed consultants to review the scheme, and a number of submissions have been made seeking changes. Photo: Independent News & Media
Finance Minister Paschal Donohoe recently appointed consultants to review the scheme, and a number of submissions have been made seeking changes. Photo: Independent News & Media
Samantha McCaughren

Samantha McCaughren

A radical overhaul of the Employment Incentive and Investment (EII) scheme has been urged by a range of interested parties following delays and other problems with the programme.

The EII scheme has been beset with difficulties since Revenue began applying State aid (GBER) rules to the scheme last year.

The scheme and its predecessor, BES, have proved to be a vital source of funding for the SME sector.

But several restrictions have been introduced, resulting in the amount being invested via the scheme falling by around half.

Finance Minister Paschal Donohoe recently appointed consultants Indecon to review the scheme. Accountancy firms, Enterprise Ireland and representative bodies are among those which have made submissions seeking changes to the scheme.

Umbrella group, the Consultative Committee of Accountancy Bodies - Ireland, said in its submission: "The tax reliefs currently in place do not appear to be capable of generating the volume of risk investment so badly needed by this sector and so are in urgent need of reform."

The Institute of Taxation (ITI) also raised concerns about the scheme in its current form.

"There is a tight and restrictive administrative process under the GBER which is stifling the use of this important tax relief aimed at helping small companies to raise finance.

"We understand from member feedback that Revenue is taking a prescriptive approach in administering the EII within the parameters of the GBER."

The ITI said that businesses are now being locked out of the opportunity to raise much needed capital investment, as the GBER provisions are being applied retrospectively to business plans prepared before its introduction.

"For example, the original business plan must provide both numerical and descriptive information of how the future funding will be spent by the business," said the ITI submission.

"Many businesses, especially smaller businesses, may have plans to raise future funding after a number of years trading but may not have envisaged in detail, at the outset, how much funding would be required in the future to expand and develop the business."

The Irish Tax Institute has submitted several case studies to highlight the problems being faced by small companies attempting to raise funds under EII.

These include a company seeking investment abandoning plans to raise finance under EII due to delays in obtaining outline approval.

In this case, a Dublin-based company in the hospitality sector sought to raise €3m to €4m through EII finance.

An application for outline approval was submitted in September 2017. By December 2017, the adviser was contacting Revenue on an almost daily basis as the approval had not been issued and the Revenue had not raised any queries on the application.

Several months later, in April 2018, Revenue sought additional information on the company's business plan - this information was previously submitted to Revenue in September 2017, as part of the outline approval application.

The company was very eager to raise the finance and proceed with the expansion of the business.

The managing director of the company became concerned that potential investors would become disinterested in investing in his business and would decide to explore alternative investment opportunities, due to the delay in obtaining outline approval.

Consequently, the company decided to abandon its plans to raise finance using the EII and instead sought to raise private equity investment, even though this would be a more expensive source of finance for the company, as investors would be expecting a higher return on their investment.

In a second case study, investors in a designated EII fund, which invested in companies in the manufacturing sector, have been waiting more than 14 months to receive their tax relief certificates.

The fund applied for outline approval on the investment in 2016 and this was processed in a month.

It has been 14 months since the fund manager submitted the application form to Revenue, providing detailed information on the investment, but the tax relief certificates have not yet issued.

Revenue raised queries on the application a month after it was submitted which the fund manager answered within a month.

Since then there has been no communication from Revenue on the status of the application and when the certificates will issue, notwithstanding ongoing and repeated weekly contact with Revenue asking for an update.

A third case study concerned plans to raise EII being abandoned because of delays waiting on clarification from Revenue

In this case, the company applied to Revenue itself for outline approval. The company devised a food ingredient to be sold wholesale into the B2C sector. The idea came from its experience of owning and working in restaurants.

Outline approval was rejected in September 2017 on the basis that the company was operating more than seven years in the same market.

The rejection did not specify which undertakings were linked.

To date (as of May 2018) Revenue has not responded to any emails, calls or correspondence relating to the matter. As the issue was not resolved before the year end, the company decided to abandon its plans to raise EII in 2017.

Consequently, the company has not been able to expand the business or raise finance because it cannot obtain clarity and is still waiting on a response from Revenue

There is some hope Donohoe will announce a new scheme in Budget 2019.

One option is that the Government could develop a notified scheme, which the EU would allow to sit outside State aid rules.

However, getting approval for this would take some time and there is scepticism that a solution to the current problems with EII will be delivered by Budget time in October.

Sunday Indo Business

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