Government plans to review the Employment Incentive and Investment Scheme (EIIS) provide a real opportunity to make improvements to a key official support scheme for SMEs.
The EIIS contains many features that are just what SMEs and investors are looking for. It is capable of delivering a positive impact for SMEs that access it; they get capital for crucial research and development and can employ more people, grow their customer base, create valuable intellectual property, target new markets and develop new leading-edge products and services.
The scheme also delivers a strong return for the State – it generated investments of €108m in Irish SMEs in 2016 on foot of an Exchequer investment of €33m, which means the State is getting more than €3 in private investment for every €1 it commits. Over 1,700 Irish SMEs benefited from it in 2016. But this number should be much higher.
The truth is that the EIIS needs reform. Investors, including venture capital funds, are moving away from the early-stage companies that the EIIS caters for and switching instead to later stage companies. But early-stage companies face a Catch 22-type situation. They cannot generate returns without capital, but they cannot get capital without proving they can generate returns.
Generally, they are not well equipped to offer higher returns in the short- to medium-term as they need every cent they can get to grow the business and higher returns tend to come later in their development.
That is why the State has to play a meaningful role in improving the attractiveness of investing in these companies.
The principle of the EIIS is sound – investors get tax incentives to deploy their capital in Irish SMEs instead of in property, bonds or equities and Irish SMEs get capital on better terms than they would in the absence of such a scheme.
Three key changes would transform the EIIS’s effectiveness and make life much easier for SMEs and investors.
Firstly, the process for getting EIIS approval is too complicated. It requires both pre-approval and approval, creating unnecessary uncertainty for investors who are making EIIS investments in advance of their chosen SMEs having final approval. This deters some investors. A simple switch to a one-stage approval process would eliminate this uncertainty. It should be possible to offer an online approval process that could be completed within four weeks from start to finish. It would give SME management teams and investors a concrete timeline and a clear path to plan their fundraising and capital deployment plans.
Secondly, the current scheme gives venture capital firms and some other shareholders preferential treatment ahead of EIIS investors in the event of liquidation.Eliminating this obstacle would result in a level playing field for EIIS investors and give them greater confidence to back SMEs.
Thirdly, the EIIS needs to be more competitive to attract investors that are currently favouring later-stage companies. To achieve this, the scheme should change the current timing restriction on receiving the tax benefits that arise from an EIIS investment. Investors should be able to access the full relief in the current tax year instead of the refund being split between the year of investment and the third anniversary of that investment.
A final enhancement worth considering is providing additional tax relief for investments that are directly aligned with the Government’s National Development Plan – in particular the goals relating to sustainability, carbon reduction, climate change and better use of natural resources.