The Impact of EIIS
25 June 2019
The structural changes to the EII Scheme proposed in Budget 2019, which took effect in January, led to a significant increase in investor interest in EIIS funds. Terry McGrenaghan, Assistant Manager, Corporate Investment & Business Advisory at BDO Ireland, explains the changes to the scheme and the impact on investors and investees.
For three decades, the Employment Investment Incentive Scheme (EIIS) (originally the Business Expansion Scheme (BES)), has provided a vital source of alternative (non-bank) funding for businesses in Ireland. Despite many welcomed reforms to the scheme in recent years, the application of certain EU State Aid rules (GBER) has led to increased complexity, resulting in administrative delays for both investee companies and investors.
Budget 2019 proposed significant structural changes to address these issues and streamline the scheme to reaffirm the EIIS as an effective tax relief for investors and a vital source of funding for SMEs.
EIIS past and present
Since its inception, the EIIS has mainly proved consistent in terms of its offer to qualifying SMEs and investors. Investee companies enjoy an alternative source of finance with no capital repayment until the end of the four-year investment period with the advantage of the investment being equity rather than debt. This coincides with investors receiving an all-income tax shelter for their investment, allowing individuals who have sufficient income tax taxable at 40% to obtain tax relief up to that level.
Historically, the EIIS operated on a pre-approval basis, which involved a qualifying company submitting an application to Revenue for review which, in turn, issued tax relief certificates to investors. With the increase in complexity came delays and an inevitable backlog of applications. To address this, Budget 2019 updated the scheme to operate on a self-certification basis, which now requires qualifying companies to self-certify and issue tax relief certificates or statements of qualification directly to investors to enable a claim for tax relief. If required, a company may still apply to Revenue for compliance confirmation but only in relation to specific aspects of the legislation.
In addition, investors are now issued redeemable preference shares rather than ordinary shares, which should provide for a more structured exit mechanism and greater security throughout the investment period.
These changes to the scheme have recalibrated the EIIS for the opportunity ahead, and both investors and investee companies should be looking closely at how this proven source of funding can play a central role in their financial planning.
With the Irish economy now the fastest growing in Europe, progressive and innovative SMEs will continue to look at alternatives to traditional funding sources as they develop their growth plans. For example, the 2018 Davy EIIS Fund has raised over €11.5 million and continues to experience significant demand from ambitious companies seeking funding. It is interested in companies with strong growth potential, a well-defined market strategy, and potential to realise the investment after four years along with a capable and industry experienced management team. It’s a prime time for SMEs to look into these funds to grow their future.
Terry McGrenaghan ACA is an Assistant Manager with BES Management DAC, the fund manager of The 2018 Davy EIIS Fund.
Content adapted from Chartered Accountants Ireland: “The impact of EIIS”