The Employment Investment Incentive Scheme looks set to become a vital source of much-needed funding for businesses in Ireland. Paddy Morrissey explains why

The Employment Investment Incentive Scheme (EIIS) has been a crucial source of funding for Irish SMEs since its introduction in 2011 when it replaced the Business Expansion Scheme (BES).

Now, EIIS, which allows Irish taxpayers to claim relief of up to 40 percent on qualifying investments, looks set to become an important source of investment for SMEs operating in a volatile economic environment in which risk appetite is on the wane.

Despite several pre-budget submissions from various bodies, Budget 2023 became the first Budget in recent years to propose no amendments to the scheme after a period in which significant changes were made.

The most significant came in the Finance Act 2019, which introduced a new self-certification-based system to replace the existing Revenue approval system. This allowed investors and investee companies to take responsibility for fulfilling the scheme's conditions. Once the investment takes place, the company may issue a "Statement of Qualification", allowing investors to claim their tax relief.

The move to self-certification was widely welcomed, as it significantly shortened the period between an investor making an investment in a company and being able to claim tax relief.

Some concerns have been raised about the uncertainty self-certification creates for a company receiving investment, however. The main concern here is that where a company is judged to be non-compliant with the provisions of EIIS, the withdrawal of the tax relief is against the company.

In a scheme known for its complexities, companies are now limited to querying particular areas of the EIIS legislation solely with Revenue. It is not possible to seek an overall opinion from Revenue on whether or not an investment will qualify – a point noted in some pre-budget submissions. With that said, Revenue's guidance notes (Part 16-00-02), coupled with appropriate tax advice, are critical resources available to stakeholders to minimise risks.

The most recent changes to EIIS came in Finance Act 2021. This extended the scheme to 2024 and removed the requirement for the benefitting company to spend 30 percent of the investment before issuing a "Statement of Qualification", accelerating the time between investment and the investor's ability to claim tax relief.

The 2021 Act also significantly broadened the scope of fund structures that can complete EIIS investments, allowing Investment Limited Partnerships or Limited Partnerships managed by Alternative Investment Fund Managers to participate in the scheme.

The 2021 Act also relaxed the 'capital redemption window' rules. Previously, exiting the initial investment before the second tranche investment had completed its minimum four-year holding period would result in a clawback of the investor's tax relief claimed on the investment. Now, investors may complete follow-on investments in a company without it impacting their ability to redeem or exit the initial investment.

Recent findings suggest a contraction in investment activity in Ireland, driven by a volatile global economic backdrop. According to the Irish Venture Capital Association, overseas funding in Irish technology companies fell by 50 percent between the first and second quarters of 2022—from €303 million to €152 million. Equally, rising interest rates are driving a higher cost of debt funding.

In this context, EIIS funding, boosted by legislative changes to the scheme in recent years, looks set to become an increasingly important source of equity funding for Irish SMEs in the coming years.

Paddy Morrissey is an Investment Associate with BES Management DAC, the fund manager of The Davy EIIS Funds