Employment and Investment Incentive Scheme

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mcaul

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Is this really as good as it looks?

If you have a small business you can get investors to invest for a minimum of 3 years and they can take 30% of the investment as tax relief in year one and a further 11% in year 3.

The only stipulation seems to be that you have to increase your payroll costs in the 3 year period.


In a way it seems to good to be true.

I'm looking to approach the bank for about 100k for expansion of my business. They reckon it should be a problem and audited accounts next month would back it up. Over 3 years I would expect to take on an extra 10-12 emoployees.

I have another option open - I can tap a couple of friends and couple of family members for the money and could buy the shares off them myself in 3 years time at a 15% premium.

In effect after tax relief, they would be investing €59,000 and in 3 years (assuming I am true to my word:) ) they would get €115,000 back. - A no brainer if the balance sheet is good enough.

Business wins as business gets finance for less than 5% a year, also balance sheet looks great because paid up share capital of 100k rather than a bank loan of 100k.

Am I missing something here?
 
See page 10 of this: ([broken link removed])

Other Circumstances in Which Relief May Be Withdrawn

"If an individual acquires an option or enters into an agreement which would bind any person to purchase any eligible shares for a price which is other than the market value of the shares, that individual will not be entitled to any relief in respect of the shares to which the option or the agreement relates.

Similarly, if an individual grants to any person an option within 3 years of the date of issue or enters into an agreement which would bind the individual to dispose of any eligible shares to any person for a price which is other than the market value of the eligible shares, that individual will not be entitled to any relief in respect of the shares to which the option or the agreement relates."

Are you saying you personally will buy the shares in 3 years (out of your own after tax income) or do you intend for the company to redeem them? If the latter, then you would not meet the trade benefit test (or the 5 year required period of ownership) under S.176 / S.177. This would mean that the amount paid in excess of the original amount subscribed for the shares would be taxed as a distribution rather than a CGT disposal.
 
I'd buy them personally but they would have an option to keep them too as they will be sold initially at fair value and they may see it as a good investment and may argue the shares are worth more than my offer.

It would ensure the company grows and takes advantage of prime sites at low rental levels and there is obviously a risk involved too. With banks asking you to bend over backwards and looking for severe levels of security, this seems a (and is probably aimed at) being a better and easier way for a company to finance growth and obviously add jobs to the economy.
 
To qualify as an EIIS you will need to get Revenue approval beforehand. I would be interested to hear other accountants opinion on this post. Are the OPs figures correct?
 
The figures are correct, but as I said above he can't have any kind of binding agreement to acquire the shares back. Therefore he could end up with minority shareholders that he can't get rid of, so it could cost him a lot more than the cost of bank finance.

There's also connected persons restrictions in there, I'm not sure on the definition, so certain family members may not be an option (haven't got access or time to check the definition used right now).
 
mandelbrot said:
The figures are correct, but as I said above he can't have any kind of binding agreement to acquire the shares back. Therefore he could end up with minority shareholders that he can't get rid of, so it could cost him a lot more than the cost of bank finance.

There's also connected persons restrictions in there, I'm not sure on the definition, so certain family members may not be an option (haven't got access or time to check the definition used right now).
Click to expand...

Family members are allowed once they don't have any other connection with the business "Individuals may qualify in respect of investment in companies owned or run by family members or close relatives of theirs (provided they are not otherwise disqualified)." but you can't say agree for joe to invest in john's business and then john invest in joe's business. Also partners in the business cannot take advantage of it either.

Naturally there is a greater risk with outsiders being involved, but then again having outsiders involved can also be very beneficial for a business.


Its something for the accountant to look at (mines on hols - hence the enquiry here), but certainly opens up another avenue of funding for a business with the risk reduced by the tax relief and one that really hasn't got much publicity (can't see any thread on aam about it)
 
mcaul said:
Family members are allowed once they don't have any other connection with the business "Individuals may qualify in respect of investment in companies owned or run by family members or close relatives of theirs (provided they are not otherwise disqualified)." but you can't say agree for joe to invest in john's business and then john invest in joe's business. Also partners in the business cannot take advantage of it either.

Naturally there is a greater risk with outsiders being involved, but then again having outsiders involved can also be very beneficial for a business.


Its something for the accountant to look at (mines on hols - hence the enquiry here), but certainly opens up another avenue of funding for a business with the risk reduced by the tax relief and one that really hasn't got much publicity (can't see any thread on aam about it)
Click to expand...

Yes, it's certainly worth looking at, but the fact remains that a bona fide transaction qualifying for the relief involves the present shareholders of the company diluting their ownership, with no guarantee that they will ever recover that level of ownership.

This scheme certainly may be a very good deal for the investors (they are getting an equity stake in a company that someone else is going to manage and grow for them), the biggest potential loser(s) is/are the present owner(s); if the company succeeds as they hope it will, they will have diluted their interest in that increase in value.


If you take an example with very basic numbers:

Say your company is presently worth €900k.

Alternative 1:
The company issues new shares worth €100k to investors (net cost to them after tax relief will be €59k). This individual now has a 10% stake in a company worth €1m.
Over the proceeding 3 years the company trades well and grows in value to €1.6m.
The investor's share, which cost them 59k is now worth 160k. They're delighted.
IF they are willing to sell you their share at that point you will have to pay them 160k for it, out of your own after tax income (or they may decide they are onto a good thing and wish to continue to hold their investment). So you own equity worth €1.44m, and 90% of all future profits generated.

Alternative 2:
You fund the expansion with borrowings from the bank, pay them their required rate of interest over the 3 years, and at the end of the period, you still own 100% of a company worth €1.5m (minus the capital & interest cost over the 3 years, say 115k). So your equity stake is worth €1.485m, and you will own ALL future profit generated.

Bottom line: If you could finance it with debt, and were confident of the ability to service that debt, it would make very little sense for you to dilute your ownership, and create the problem of how to recover that ownership in the future.
 
I had a look at this scheme and I don't really understand the Revenue Leaflet IT 55.

"The scheme is available to the majority of small and medium sized trading companies. However, the following trading activities will not be eligible for the scheme

  • Adventures or concerns in the nature of trade
  • Dealing in securities etc.
  • Professional service companies
  • and some other more specific cases"
What is an "adventure or concern in the nature of trade?"



If I set up a company to buy and sell antiquarian books, could I fund it through this?



If I set up a grocery shop, could I fund it through this?



"The use of funds must contribute directly to the maintenance or creation of employment in the company"



So if the book dealing company employs a person, then it is ok?



If I am approached by a company to invest, how do I know it will qualify for the tax relief? Does the Revenue provide a cert in advance?
 
mandelbrot said:
If you take an example with very basic numbers:

Say your company is presently worth €900k.

Alternative 1:
The company issues new shares worth €100k to investors (net cost to them after tax relief will be €59k). This individual now has a 10% stake in a company worth €1m.
Over the proceeding 3 years the company trades well and grows in value to €1.6m.
The investor's share, which cost them 59k is now worth 160k. They're delighted.
IF they are willing to sell you their share at that point you will have to pay them 160k for it, out of your own after tax income (or they may decide they are onto a good thing and wish to continue to hold their investment). So you own equity worth €1.44m, and 90% of all future profits generated.

Alternative 2:
You fund the expansion with borrowings from the bank, pay them their required rate of interest over the 3 years, and at the end of the period, you still own 100% of a company worth €1.5m (minus the capital & interest cost over the 3 years, say 115k). So your equity stake is worth €1.485m, and you will own ALL future profit generated.

Bottom line: If you could finance it with debt, and were confident of the ability to service that debt, it would make very little sense for you to dilute your ownership, and create the problem of how to recover that ownership in the future.
Click to expand...

The good news on my end is I got provisional agreement from the bank for 60% of the funding as a stocking loan - albeit at 9.75% and frankly, I can make it work with that level.

I see where you are coming from and when I look at the cost of finance and the fact that it has been provisionally approved makes the scenario totally different.

But taking away my interest, the scheme certainly is a good alternative way to raise funds for a start-up where the bank simply is not willing to take the risk. There are still plenty of gamblers out there who would throw 10k at 10 different companies and hope 7 will pay off and for a start up, having even 70% of a well financed company rather than 100% of a poorly financed company is far better. There's also the family option for many too - many family members will help anyway, this just gives a little cushion to them.

Just surprised that there has not been a lot more discussion about it as it does seem to be quite generous and is available to a much much wider range of business than the BES scheme was.

As to Bendan's queries - from what I see, it is available for a grocery shop or buying/selling books. Revenue do issue certs (after funding thoigh), but if I were investing I'd make sure via accountant or tax adviser that the business would qualify before putting the money in.
 
Hi Brendan
I have been trying to to understand the meaning of "Adventures or concerns in the nature of trade".
Can you recall the source of that explanation? I appreciate that your use of 'apparently' indicates that the comment was less than certain.
Thanks
 
Can anyone confirm if my figures add up here

Gross Salary 2012|€80,000
Standard Rate Tax Band|€41,800
PAYE Paid @ 41%|€15,662
|
Investment|€52,206
Tax Relief @ 30/41sts of Investment|€38,200
PAYE Refund|€15,662

Essentially would get a 30% refund on their investment?
 
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