Finance Bill changes on EIIS are welcome

Finance Bill changes on EIIS are welcome

Allowing losses to be counted against capital gains tax would seem to be a no-brainer considering the risks involved in investing in start-ups

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21st November, 2021

The Finance Bill is now going through the Oireachtas and it contains a number of changes in relation to the schemes for investment in corporate trades and in particular Employment Investment Incentive Scheme (EIIS) and Start-up Relief for Entrepreneurs (Sure). There was a public consultation on this regime earlier this year and the minister announced in the budget speech that reforms to these schemes would be forthcoming to make the scheme more attractive to investors. A discussion of some of the amendments follow below.

Part of the criteria for availing of these reliefs has been for the relevant company to have spent 30 per cent of the funds raised on a “qualifying purpose”. Until this target is met the company cannot issue a “statement of qualification” to the investors. The amendment to this provision removes the 30 per cent requirement and changes the time frame in which such a statement can issue. In addition, further amendments expand the range of investors who are eligible to participate in the scheme. The legislation will now enable investment funds to raise investments that qualify for relief, specifically Investment Limited Partnerships and Limited Partnerships that meet relevant criteria.

In respect of finance-raising measures for scaling Irish businesses, any reforms which make them more attractive and available to a wider pool of investors are welcome. As such, a focus on a wider range of measures to provide relevant funding to these scaling businesses is vital to support and enhance the sector.

EIIS has to interact with Capital Gains Tax (CGT), and it does . . . well kind of. If you invest in an EIIS company and it succeeds, then you pay CGT on any gain arising when you sell the shares, just as you would with other investments. However, when an investor makes a loss on disposing of their EIIS shares, that loss may not be allowable for CGT purposes. Had that investor put his or her money into a non-EIIS company and lost money on that investment, they can use that loss in reducing other capital gains in the same or future years.

How you exit an investment has to be thought about when considering making the investment in the first place because “what’s the worst that can happen?” Ensuring loss relief on EIIS investments would serve to reduce, but not eliminate, the risk in investing in such companies and thereby increase their appeal to would-be investors.

The Tax Strategy Group’s (TSG) Capital & Savings Tax paper published earlier this year dealt with this matter. It explains that the issue of CGT loss relief came up as part of the Department of Finance’s public consultation on EIIS. Specifically, a number of submissions sought the introduction of CGT loss relief on failed or loss-making EII scheme investments, part funded by allowing a deduction for the acquisition cost of the EIIS share from the ultimate disposal proceeds, therefore eliminating any “doubling up” of income tax and capital gains tax relief on gains. The group continues that the issue was also raised by Indecon in its 2018 review commissioned by the Department of Finance. The group referenced a view that the availability of tax relief on losses in British schemes was a useful dimension which made British EIS/SEIS investments more attractive for investors given the high risk nature of investments in start-ups.

The TSG states that the impact of loss provisions on risk taking and its consequences for the riskiness of capital portfolios is complex “but that there is good reason to believe that incomplete loss offset will discourage risk taking. Nevertheless, any such review of this area is likely to spill over to other areas where treatment of losses is restricted eg, in relation to the treatment of funds”. You can see their point, but this would be a good law change for potential investors when considering such companies in the first instance.

Such a relief is not in the Finance Bill so far. That said, the Commission on Taxation (or as I’ve been calling it in these pages “COT2.0”, given it’s the second such commission of the noughties) issued a public consultation recently. It notes that “SMEs account for 99.8 per cent of all Irish enterprises and they are responsible for employing over two-thirds of Ireland’s workforce across multiple sectors . . . The Commission is examining how best . . . to support small and medium sized enterprises and entrepreneurs to start, scale or grow a business while meeting emerging changes in social behaviour, business models and value drivers”. Will we see loss relief in COT2.0’s report next July?

Overall, the changes made in this year’s Finance Bill thus far are to be welcomed.

Tom Maguire is a tax partner in Deloitte

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