Maura Ginty of Gintax discusses the Start-up Relief for Entrepreneurs. She explains how this all too often overlooked relief is potentially extremely valuable to new-stage entrepreneurs leaving employment to commence their own business venture.
Start-Up Relief for Entrepreneurs (SURE) is an Irish income tax relief targeted at founders of new businesses who leave employment to start their own company full time. The relief works so the individual can receive a refund of Irish income tax paid over the prior seven years on an investment in their new company.
A total of twenty-seven individuals claimed the relief in 2022, with only a slightly higher number of claimants in 2021 and 2020.
Anecdotal experience suggests that many more could have been entitled to the relief. To my mind there are two primary reasons for this—the complexity and the investment requirement. While in some respects these are valid concerns, they are not insurmountable, and should not be the immediate ‘dealbreakers’ they seem to have become.
This article gives a general overview of the relief and the key provisions that are likely to have an impact in practice. It does not attempt to be comprehensive and is intended to be a general overview to establish potential eligibility. First, some further background on the two challenges noted above.
The headline challenges
1. The regime generally / complexity
The SURE regime is complex and convoluted. SURE is drafted as an add-on to the Employment Investment Incentive Scheme (EIIS) rules with the EIIS being the tax incentive scheme for third party individual investors in Irish SMEs. For SURE, a founder needs to meet specific SURE requirements in addition to general EIIS rules. The specific EIIS sensitivities are well trodden by now but to refresh:
EIIS is niche area of tax law with any eligible investments triggering a tax risk for the business – even an administrative error can result in full clawback of investor tax relief as a company liability.
The EIIS regime is a form of EU State Aid, with many terms in Irish law imposed directly from EU regulation albeit with no formal definitions attaching to these terms (which would be the norm in Irish tax law). Helpfully, this is one of the few areas of tax law in which a taxpayer may request an advance opinion from the Revenue Commissioners. However, there is no time limit for Revenue engagement, and this creates further uncertainty for clients (usually in midst of a fundraising round with a 31 December deadline).
Notwithstanding the above, in my view, many of the peculiar EIIS sensitivities resulting from EU regulations should not impact a new stage business, such as a SURE company, particularly in cases where a founder was simply an employee with no other business or family business interests. Certainly, there are aspects which will require careful management, such as preparation of a formal business plan, but these should not lead practitioners and their clients to discount a SURE claim.
2. Requirements for founder to invest in share capital
Another reason for low take up is the requirement for a founder to invest in actual share capital of the company. In contrast, the default market practice tends to be the issue of nominal share capital to the founder with any further investment being simply lent by them to the company, as a director’s loan. The latter is straightforward and as the company generates cashflow, the loan can be repaid in a tax neutral manner.
The initial client conversation in relation to SURE usually stops on this topic. However, to my mind, two further factors need to be borne in mind:
Where a company is to subsequently seek external investors, then it is often a commercial requirement that any directors loan is converted into share capital at that point in time. In many cases, at that stage it is too late to claim SURE in relation to the founder investment.
Even after a SURE investment, it is still possible for the founder to take a salary from the company which will enable them to finance their day to day living expenses at startup stage. While salary is taxable income, it should be noted that the effective Irish tax rate for a single individual on a €30,000 salary is circa 12 per cent (being USC, PRSI and income tax after credits). This can be contrasted favourably with SURE tax relief which now can result in maximum refund of up to 50 per cent of the amount invested.
Overview of the relief
On paper, the relief appears generous with a maximum relief in any single tax year of €140,000 but this can potentially be claimed over 7 separate years. As a result, technically a single cash investment of up to €980,000 would be eligible for relief.
The relief ideally suits an individual who had a substantial employment income in recent years (such as share option gains, termination payment or even simply a significant salary), has no other business interests and wishes to commence a new business.
Tax relief available
There were significant changes introduced to the EIIS regime, effective from 1 January 2024 as a result of amendments to the underlying EU regulation. Prior to this, the quantum of tax relief available was at a person’s marginal rate (up to 40 percent) for qualifying investments, subject to an overall cap. The new changes result in varying amounts of relief, depending on the particular stage of the business life cycle.
These changes now apply to SURE investments. I would expect that most qualifying SURE claims could be eligible for tax refunds at up to 50 per cent or 35 per cent of the amount of investment. The differing rates apply as follows:
Where the company is not yet operating in any market, the rules operate so that an income tax refund of up to 50 per cent of the investment could be available (relief is available at 125 per cent of the amount invested; the marginal income tax rate is 40 per cent). The term “not operating in any market” derives from EU regulation and Irish Revenue regard this as an operation that has not yet made its first commercial sale.
Where a company is operating in a market, then a tax refund of up to 35 per cent could be available (relief available at 87.5 per cent of the amount invested).
For the reliefs noted above (50 per cent and 35 per cent), the investment would need to be classified as “initial risk finance” which relates to early-stage companies (as defined). Most SURE eligible investments should be in this “initial risk” category. However, there is a technical provision for a lower rate to apply.
In the context of the terms above, the requirements (as to first commercial sale/initial risk finance, etc.) technically need to be met by all entities within an “RICT group”—a concept derived from EU Regulation.
Further, many other EIIS conditions apply by reference to this concept. For SURE specifically, I would expect that a newly established business owned by an individual who had been in long term employment (with no other business interests) to be a standalone “RICT group”. Thus, the references in this article are to a singular company.
SURE – headline conditions
The key conditions for SURE are:
A company must be established carrying on a new business. There is two-year window to make the SURE investment and it must be made by 31 December in the second year after the company’s incorporation. The trade activity must be new, and the company cannot have taken over an existing trade, such as a sole trade.
The individual must:
Have mainly employment (PAYE) income in the previous four years.
Take up full-time employment in the new company - an existing employment can be retained for up to 10 hours per week (there is no stipulation as to salary level).
Invest cash in the new company by acquiring shares - there is also a provision for relief on conversion of existing directors’ loans within a certain timeframe (this route will require an auditor’s statement).
Retain the shares for at least four years.
Hold at least 15 percent of the shares in the company.
Not hold more than 15 percent of any other company (this requirement can rule out many employees who have had other business ventures).
There is a requirement that the company carry on “relevant trading activities”—this definition includes most trades apart from those on an “excluded” list. Excluded trades include financing activities, professional services, and land dealing. Professional services are specifically defined and include legal, accounting and medical services. The exclusion does not extend to engineering or computer programming. “Research and Development and Innovation” activities may also be permissible. The relief could apply to new tech startups or also to those entering traditional sectors, including consultancy services.
Specific EIIS requirements for SURE investments
Qualifying company
The company will need to be regarded as a “qualifying company” which is the same requirement as the current EIIS rules. This involves tests such as being an SME, satisfying the “undertaking in difficulty” test, and the requirement to have tax clearance.
The conditions can be limiting—especially the requirement that the company cannot be under the control of another company—limiting flexibility for founders, or other controlling shareholders, with a holding company structure often their preference.
Qualifying investment
Similarly, the EIIS “qualifying investment” requirements will need to be met—key here is that the money must contribute directly to the creation or maintenance of employment.
While the EIIS conditions requiring there to be no arrangements to reduce investor risk are still applicable, in practice they should not cause any commercial difficulty for a founding shareholder.
The investment must be based on a business plan. In drafting the plan, consideration should be given to the scenario where EIIS is either to be offered or potentially offered to new external investors.
Administrative requirements / clawback risk
There are administrative requirements which need to be met including submission of a specific tax return (RICT return) by the company and provision of a Statement of Qualification (SQSURE3) to the founder. The actual technical administrative requirements are not unduly onerous, but it is critical they are met.
Similar to EIIS, there is a provision which deems clawback of tax relief to be a liability of the company in certain cases, e.g. where the Statement of Qualification is incorrect, such that the company will not be considered a “qualifying company”.
Summary
In conclusion, while SURE relief offers significant potential benefits for founders of new
businesses, its complexity and specific requirements (outside of commercial norms) have clearly limited the uptake.
There has been much lobbying of Government to simplify the entire suite of investment reliefs, with particular focus on the prohibition of a holding company and for SURE specifically, its restriction to employees only. Given the lack of success to date, one would suggest that all stakeholders reconsider the SURE rules as they stand—especially for cases where founders are satisfied to progress with a standalone company. One also hopes the soon-to-be updated Irish Revenue guidance documentation on SURE/EIIS will better assist all parties navigate matters here.
Maura Ginty is a Chartered Accountant and Chartered Tax Advisor with over 20 years of professional experience advising clients. She advises Irish and international businesses at all stages of development from start-up, expansion in Ireland and abroad, acquisition, day-to-day operations, and restructuring to succession and disposal.
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