47 – 49 Pearse Street, Dublin 2

Mr Gary Tobin

Principal Officer

Department of Finance

Government Buildings

Upper Merrion Street

Dublin 2

By eMail to Gary.Tobin@finance.gov.ie

22 October 2012

Dear Gary

CCAB-I Pre-Budget Submission 2013, Employment and Investment Incentive Scheme (EIIS)

I refer to our discussions on 4 October last. You will recall that we highlighted to you a number of issues in relation to the EIIS, particularly our belief that because the bulk of the tax relief is subject to the Higher Earners Restriction, it would prove to be unattractive to potential investors. We offered to carry out a straw poll of accountancy firms as further evidence for our comments. Accordingly, we contacted over a dozen firms of varying sizes (including “big 4”) and from locations around the country. We asked them to indicate to us the number of EIIS projects which they have in the pipeline, and the number of investors for whom they acted who might wish to invest in EIIS. We also asked for any views or observations they might have on the operation of the incentive from their experience in its first year.

EIIS Pipeline Projects

In a written answer to a Dail Parliamentary Question (27812/12) in June of this year, the Minister for Finance indicated that the take-up at the time was very low, with some €2.38 million invested under EIIS, involving 11 companies. The responses from the firms contacted suggest that at this point in the year, that number of companies is unlikely to increase substantially. Most of the firms told us that they had either no projects in the pipeline at all, or projects numbering only in single digits. One firm with a major profile in the BES/EIIS market advised us that the number of EIIS projects they have in hand is only one third of the number of comparable BES projects at the same time in 2011.

The difficulty with interpreting these indications is to whether or not the sluggishness in the supply of schemes is attributable to the design of EIIS or to the general market downturn. However several respondents indicated to us that the three year investment period is too short for companies to accrue any benefit in that time. Although the objective of the change was to make the scheme more attractive for investors by shortening the investment period, the reality is that for many companies the period is too short to secure the funds, put the investment to work, adjust the business model and generate a return sufficient to repay the investment.

EIIS Investors

The position of potential investors in EIIS is perhaps more easily described. There are clear indications that there are fewer taxpayers with the investment capacity for EIIS. However other trends have emerged which can be directly linked to incentive design:

Risk – while an EIIS investment is inherently risky, unlike BES, so too is the quantum of the tax relief available. Essentially, not only is the amount invested at risk, there is risk associated with whether or not the final 11% of investment relief will be available.

Timing – linked to risk is the timing of the availability of the tax relief, with only 30% being available upfront. The balance of relief is contingent on increasing employment numbers and maintaining average remuneration and/or increasing expenditure on research and development. It appears that this may also be a factor in the number of available projects. Some sponsoring companies regard the administration overhead to satisfy these requirements as disproportionate in the context of the monies being raised.

High Earners Restriction – there are clear indications from all the firms surveyed that this is a key factor in determining the number of potential investors. As one firm put it to us – “Some of my High Net Worth clients (say 20) would be interested in participating if they felt the project was secure and if there were no High Earners Restriction. However, to date, when we run the numbers, none of them see the point in even looking for a scheme because they are already suffering from the High Earners Restriction for their charitable donations and capital allowances. At this stage, we barely even mention it to clients any more as it is so unattractive.”

Despite these criticisms, it would be wrong to conclude that the overall attitude towards EIIS is negative. Several firms noted that they anticipated a growth in demand for share based risk investments in future years. Equally firms noted that it is worthwhile to provide tax based incentives to fund industry. However, we now have clear indications from the industry that there are some design flaws within the EIIS. The Office of the Revenue Commissioners will have a clear picture over the coming weeks of the number of EIIS schemes in play for 2012. If this number is down on comparable numbers for BES, or perhaps more significantly, if the amount of funds raised is down on prior years, we would suggest that this will provide even firmer evidence of the need for reform in Finance Act 2013.

I hope this letter will help provide some direction as regards changes which could usefully be made. We are conscious that modifications to the EIIS will probably require EU Commission approval under the State Aid rules. There would therefore be a certain urgency for considering and notifying any change, if we are to avoid the difficulties encountered in 2011, where arguably EIIS approval came too late for any degree of success in that tax year.

Yours sincerely

Liam Lynch

Chair, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie