47 – 49 Pearse Street, Dublin 2

Employment and Investment Incentive and Seed Capital Scheme Consultation,

Income Tax Incentives Section,

Fiscal Policy Division,

Department of Finance,

14-16 Upper Merrion Street,

Dublin 2

9 May 2014

By email to: taxpolicy@finance.gov.ie

Dear Sir/Madam,

Consultation on Employment and Investment Incentive and Seed Capital Scheme

We refer to the public consultation which commenced on 31 March 2014.

Your consultation paper requests views on the Employment and Investment Incentive and Seed Capital Scheme in relation to the operation of the schemes and any changes that might be proposed. In summary, our position is that Seed Capital Relief should be amended to allow for a mix of loan and equity investment which can be structured to ensure that the relief is not abused while still allowing the entrepreneur to make a commercially viable investment. EIIS relief should be permanently removed from the list of reliefs to which the High Income Earner restriction applies, and the relief should be extended to service companies and the print media. A scheme similar to the UK's Seed Enterprise Investment Scheme should be introduced to assist small start-up companies.

Funding outside of Share Capital

EIIS and Seed Capital Relief are predicated on the requirement for the investor to purchase shares in the company and hold those shares for a three year period. While this requirement is commercially appropriate for investments aimed at third party investors, it is not a tax efficient or a commercially appropriate means for the owner/manager to invest in his company. The exit mechanism of share sale, which is the only mechanism currently permissible, does not support his/her long term involvement with the business.

In general, owner/managers of SMEs make a personal investment in the business by way of a loan to the company. If a share investment is made then he/she must either liquidate or sell the shares in order to realise a return on the investment. The Seed Capital Relief rules for owner/managers of SMEs require such individuals to dispose of the business they have worked hard to build up in order to get a return on their investment.

EIIS and Seed Capital Relief are the only tax relief options open to the owner/manager since the income tax relief for loans used to invest in companies was abolished. We strongly recommend that the Seed Capital Relief scheme in particular should allow for investment by way of a loan to facilitate the long term development of the business and involvement of the entrepreneur.

This could be structured by extending the definition of a relevant investment to a 15% investment made up of both equity and loan capital. Concerns on safeguarding genuine use of the relief could be addressed perhaps by linking the holding period to the loan/capital ratio. For example, a 15% investment made up of 5% equity and 10% loan might require a holding period of 5 years. Correspondingly, a 15% investment made up of 10% equity and 5% loan might require a holding period of 1 year. It may also be necessary to introduce a preclearance mechanism to any refinancing of the loan capital, to ensure that the original funding purpose is adhered to. A clawback of relief would apply if the loan is repaid before the requisite holding period or the refinancing arrangement covers personal loans etc.

Professional Service Companies

Professional service companies are equally capable of providing job opportunities but are excluded from the EIIS. The financial model of professional service companies is currently based on running the business on an overdraft or loan. These companies have many uses for outside investment which would be used for equally worthy purposes as with other trading companies who can benefit from the EIIS. The EIIS should be expanded to allow for investment in professional service companies.

Print Media and EIIS

The print media sector in Ireland is in commercial turmoil primarily because of changes in how consumers access news. Tax policy can be a worthwhile way of addressing such a market failure.

We consider that the broadsheet print media provides a very important public service. The reduction in the VAT rate to 9% as it applies to many areas within the sector is helpful. However, there remains an argument for some additional incentive to drive investment in the sector.

The EIIS is designed to encourage ordinary taxpayers to become shareholders. Since the Credit Crunch, tax based investment schemes serve an even more critical purpose than merely fostering industry – they can address a market failure to provide funds to support enterprises coping with a transition in technology such as print media.

We suggest that just as the definition of relevant trading activities was modified to specifically include tourist traffic undertakings, the definition should be modified to specifically include print media activities.

Establishing the Creditability of EIIS Relief

The EIIS relief was temporarily removed from the list of reliefs to which the High Income Earner restriction applies under Finance (No 2) Act 2013 for a period of three years. However, it is important for the purposes of establishing the relief as a creditable option for investors that the relief is permanently removed from the High Income Earner restriction.

The EIIS investor should also be entitled to upfront tax relief at 41%. The tax benefit of 30% as a reward for high risk investment is inadequate when coupled with the absence of a guarantee that an additional 11% relief will ultimately be available as a result of the company not meeting the requirements necessary to generate the 11% additional relief or as a result of a change in tax law.

Small Start-Ups Specific EIIS

Small start-up companies must compete with established companies for limited investment and the investor will obviously favour the established company due to lower risk. The start-up company is directly creating new jobs. A tax incentive for investment in smaller start-up companies should be introduced similar to the Seed Enterprise Investment Scheme launched in the UK in 2012. As of November 2013, this scheme has raised over £89 million in funding for more than 1,250 start-ups. The key features of the Seed Enterprise Investment Scheme are as follows:

• The scheme is focused on smaller, early stage companies carrying on, or preparing to carry on, a new business in a qualifying trade.
• Tax relief is available to investors who subscribe for shares and have a stake of less than 30 per cent in the company.
• It applies to smaller companies with 25 or fewer employees and assets of up to £200,000, carrying on or preparing to carry on a new business.
• The scheme provides income tax relief worth 50% of the amount invested up to £100,000 per individual investor with a stake of less than 30% in such companies, including directors who invest in their companies.

About CCAB-I

The Consultative Committee of Accountancy Bodies – Ireland is the representative committee for the main accountancy bodies in Ireland. It comprises Chartered Accountants Ireland, the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland, and the Chartered Institute of Management Accountants.

Brian Keegan, Director of Taxation at Chartered Accountants Ireland (brian.keegan@charteredaccountants.ie, 01-6377347) may be contacted if any further details in relation to any points made in this submission are required.

Freedom of Information

We note the scope of the Freedom of Information Act in regard to the submission. We have no difficulty with this response being published on the Tax Policy website of the Department of Finance. This response will be published on our own website and will be available to all of our members and the general public.

Yours faithfully

Paul Dillon, Chairman, CCAB-I Tax Committee

Source: Chartered Accountants Ireland. www.charteredaccountants.ie