It is that time of year again when all the stockbroking and accounting firms and a few niche providers start to roll out their EII offerings for the year.
EII or the Employment and Investment Incentive was originally the BES (business expansion scheme) but in 2011 it was reformed and renamed to the current EII.
The idea behind these schemes is that an individual can invest in a company, (up to €150,000 in any given year) and if the company uses that money to either employ more people or for research then the individual gets tax relief of 40% on their investment.
The relief is broken down as 30% of your investment in year 1 and 10% of your investment in year 4. So for a €100,000 investment you should get €30,000 back initially from Revenue and €10,000 after the 4 years provided the company meets the requirements.
You are of course hoping to get some return on your investment too but be warned that not all of these investments are gearing up to give you back much more than your initial investment and the tax relief. Some of the investments providers believe you should be happy with 40% return and if they are diluting down risk that might be attractive, but only if they are diluting down risk.
You can access EII in several different ways. The most simplistic is to find a company who is raising money directly from the public themselves without the use of any third party or fund manager. You will cut out some fees and charges dealing directly with the company and you should also be able to get some face time with the key people in the business. This can offer great comfort, but it does mean you are left to do all your due diligence yourself and investing with one company can be a little more risky than investing in a group of companies.
Another way to invest is via a fund. There are some specialist niche providers out there who have for years been packaging a few companies together in the form of a fund and then taking one cheque from you and spreading it across all of the target companies.
Sometimes these niche providers will specialise in one particular area, for example the green energy sector. Some fund providers put representation on the board of the target companies but the norm tends to be that they simply reserves the right to a seat on the board.
These fund managers would also review the company’s business plans to see if cashflow projections are strong and that there is a plan in place to repay investors. Ongoing active review of this business plan by your fund provider is the key difference you would expect to investing directly yourself with the company.
When comparing one EII fund to another you should press a little to see what expected returns are. Some fund managers only go after getting your money back others are targeting a significant return on the investment in addition to the tax relief. It is generally quite clear from past returns what way a fund is being run as to whether they are seeking return in addition to the tax relief or not. But please remember more potential return usually translates into more potential risk.
An interesting selling point from some providers with long tenure in this marketplace is the fact that when the scheme was revamped in 2011 the amount of money a target company can raise was increased from €10 million to €15milllion, this presents a unique opportunity for these managers.
They have a relationship with companies who had previously maxed out their fund raising threshold and they can now revisit these companies for a further €5million of investment. This is believed to be less risky than taking on a new company that is at an earlier stage in its life cycle.
A significant change is also the fact that businesses in Dublin, Meath, Kildare, Wicklow and Cork City who have turn-over of €10million or more were completed excluded from the scheme. These are now being brought back into the fold (subject to EU approval)
But interestingly Nursing homes have also now been included.
Although fund raising happens at this time of year that is more investor driven, in typically Irish fashion there is nothing like an end of year deadline to focus the investors mind. However the funds tend to be looking for target companies all year around, so if you own a company and would like to try and get funding from one of these funds it is not only now that you can talk to these companies.
What makes EII different to some other tax incentive schemes is that it doesn’t matter where your income comes from. The relief is allowable against paye, self-employed, pension or even rental income. You do need to be paying tax at the higher rate to avail of the full relief. Investments generally start at around €5000 minimum and the legislation allows for up to €150,000 in any one year.
We are currently doing a review of some of the schemes available and would expect to have a report in the next week or two. If you would like a copy of this report please email firstname.lastname@example.org and ask Colleen to add you to the list and we will send it out when it is ready.