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We need to do more for entrepreneurial companies

Tom Maguire discusses tax measures for entrepreneurial companies in his latest Business Post column

Last Saturday, before the rugby, I “virtually attended” Scale Ireland’s regional summit. Scale Ireland is an independent body representing Irish tech start-ups and scale-up companies. The keynote speakers that day were the Taoiseach, Leo Varadkar and Minister of State at the Department of Enterprise, Trade and Employment, Dara Calleary. Other speakers included leading founders and CEOs from indigenous start-up and scaling companies.

This event was held the day after Scale Ireland had published its findings of its “State of Start-ups Survey 2023” which 248 Founders / CEOs completed. Not surprisingly, access to finance screams out as the biggest challenge facing indigenous tech start-ups. More than half of the CEOs and founders surveyed (51.6%) considered funding to be their biggest challenge in the last year, (up from 47% in 2021) as compared to recruitment and retention of staff (17% in 2022, compared to 25% in 2021) and the cost of doing business (12% in 2022, compared to 8.7% in 2021). So, to sum up, these key issues were (1) investment (2) staff and (3) cost of business. I lost count of how times the Employment Investment Incentive Scheme (EIIS) and the Key Employee Engagement Programme (KEEP) came up as key issues in dealing with these matters.

At the Summit, the speakers on the day said these were great initiatives but more needed to be done to make them more effective. Regular readers of this column will know I have been frequently writing on these issues.

I was delighted to read Minister McGrath referring to both EIIS and KEEP (as well as Entrepreneurial relief from a Capital Gains Tax perspective) as being significant in encouraging “investment in our economy and in particular our indigenous SMEs” in his speech at last week’s Institute of Taxation’s annual dinner.

The Minister noted that “As a new Minister for Finance, I intend on taking a fresh look at all the enterprise tax measures on the table to assess whether they are working properly, and fulfilling the potential that we know our economy can deliver. So, I am putting you all on notice, I will read all the Budget submissions that come in, but get them in early and I know you will focus on positive suggestions that will lead to more investment, and more job creation in our country”. So fingers crossed this is among the first pre-budget submissions that are made in connection with the above.

In a nutshell, the EIIS provides for tax relief for investments made in certain corporate trades. I’ve always said in this column that when it comes to investment, simplicity eats complexity for breakfast. For example, the relief is an income tax relief, but it doesn’t reduce other income levies. People see these levies as reducing the amount of income they take home, so it would reduce complexity of the relief and indeed explaining the relief by allowing it to reduce these levies as well. Of course, increasing the level of the relief available would be top of the agenda but ease of access would sit right beside that suggestion.

If you invest in an EIIS company and it succeeds, then you pay Capital Gains Tax on any gain arising when you sell the shares, just as you would on any other investment. So, in Ireland there’s no discrimination between investors when 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 deciding whether to make such an investment in the first instance. How many times do we hear, “what’s the worst that can happen?” when talking about 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 such investments’ attraction to would-be investors.

Moving on to KEEP. Its aim is to allow “David” companies to appropriately compete with the “Goliaths” with more cash resources to society’s benefit. It provides an exemption from income tax, USC and PRSI on any gain realised by an employee on the exercise of a qualifying share option. Instead the gain will be subject to Capital Gains Tax (CGT) on a subsequent disposal of the shares. However, we know KEEP’s take up has been very low.

There is a valuation requirement i.e. that the share options have been granted at market value, that each employee’s entitlement does not exceed the relevant annual/lifetime limit and that the aggregate issued but unexercised share options do not exceed a certain monetary limit. Here the Tax Strategy Group (TSG) had previously made some suggestions, for instance Revenue providing safe harbour for valuations as well as providing more guidance on appropriate methodologies for undertaking share valuation (with examples) and guidance on how long a valuation remains “in date” (i.e. from last funding round / last professional valuation).

The TSG outlines some counter arguments e.g. significant additional resources would be required if Revenue were to approve such valuations. These are not unreasonable counters but they can all be dealt with. A perfect regime will never exist as there will always be opponents on both sides but the need for perfection should not stand in the way of the good.

Certain companies are excluded from participation in KEEP placing them at a disadvantage in attracting staff and this should be revisited. Changes could be made around employee and share option company limits and potentially reducing reduce the applicable tax rate to 10% on the disposal of KEEP shares.

The recent Commission on Taxation supported the policy objectives behind EIIS but noted its concerns regarding complexity and accessing it. That Commission pointed out KEEP wasn’t achieving its objectives and recommended broadening its use. The importance of EIIS and KEEP is clear. Budget 2024 is not too far away so let’s make some changes here.


Please note this article first featured in the Business Post on Sunday, 5 March 2023 and was re-published kindly with their permission on our website.

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