The Tánaiste and Minister for Finance, Mr. Brian Cowen T.D., announced today (29 August) that State aid approval has now been received from the European Commission for the extension and amendment of the Business Expansion Scheme (BES) and the Seed Capital Scheme (SCS).

The Tánaiste said “all of the studies carried out on these schemes, including the review carried out by my Department prior to the Budget last year, have shown that there is a strong business case for continuation of these schemes. It is clear that businesses, particularly small and start-up companies, often experience difficulty in accessing early stage development capital. I am delighted to have secured the necessary approval from the European Commission under State aid rules. It is generally recognised that there is a shortage of such finance in the pre and early start up phases of new enterprises. The BES and the SCS will continue to play an important role in helping bridge this financial gap for such businesses. The importance of these schemes is further reflected in our continued commitment to them in the agreed Programme for Government.

The extension of these schemes will encourage further enterprise, incentivise innovation and promote competitiveness in Irish industry. They will help position our businesses for long-term success.

Many of the firms using BES are small to medium-sized manufacturing companies operating in various parts of the country. They make a vital contribution to job creation and to maintaining our competitiveness.”

The Tánaiste noted that the approval received, after a careful and professional examination by the Commission, is subject to a number of conditions and a small number of amendments to the legislative provisions governing the schemes will be necessary. The Minister intends to bring forward shortly the necessary amending provisions. Full details will be set out in a Regulation but the changes will provide essentially that as and from 1 January 2007:

·        Medium-sized enterprises may qualify if they are located in assisted areas (currently includes all counties except Dublin, Meath, Kildare and Wicklow, as defined under EU State aid guidelines). In non-assisted areas (currently counties Dublin, Meath, Kildare and Wicklow) they may qualify where they are in seed or start-up phase only.

·        In order to comply with EU rules on the cumulation of State aids, a company that raises finance under the BES and/or the SCS will have the level of other State aids affected (with the exception of grants for research and development).

The Tánaiste said that “These EU conditions should not significantly hinder the overall contribution of the BES scheme to economic development and employment.”

28 August 2007

Note for Editors

Technical Note – Background details

In Budget 2007, Minister Cowen announced that having taken account of the results of a comprehensive review of the Business Expansion Scheme (BES) and the Seed Capital Scheme (SCS), he had decided to extend both schemes until 31 December 2013. The company limit for both schemes would be increased to €2 million, subject to a limit of €1.5 million being raised in any particular 12 month period. The limit on the amount that an investor can invest is also increased to €150,000 per annum for the BES and to €100,000 per annum for the SCS. In the Finance Act 2007, the legislative provisions for the extension of the schemes and the new company limit of €2 million, along with some additional changes in relation to the operation of the schemes, were made subject to a Commencement Order being signed by the Minister. This was in order to allow an application be made to the European Commission for approval of the schemes under State aid rules. The Commission, having assessed the schemes, have granted approval for them until 31 December 2013 under the Community Guidelines on State aid to Promote Risk Capital Investments in Small and Medium-Sized Enterprises. The Commission’s approval is subject to certain conditions.

The necessary Regulation and Commencement Order will be signed by Minister Cowen shortly, bringing the schemes into effect from 1 January 2007 with an expiry date of 31 December 2013 in line with the Commission approval.

The BES provides a tax incentive to private investors to invest long-term equity capital in companies (particularly new and smaller ones), operating in certain sectors of the economy, which would otherwise find it difficult to raise such funding and would instead have to rely on loan finance which in turn can be difficult for small and start-up companies to obtain. Provided an investor holds his or her investment for a minimum period of 5 years, the BES provides individual investors with tax relief, at their marginal tax rate, in respect of investments of up to €150,000 per annum in companies engaged in certain activities especially in sectors such as manufacturing, services, tourism, and Research and Development.

The aim of the SCS is to encourage individuals currently or formerly in employment to establish new business ventures. The scheme provides a refund of tax paid in previous years to employees who leave employment and start their own business. The size of the refund depends on the amount of the individual's investment and effective tax rate. For any particular year, the refund is limited to the tax the individual has paid in the previous six years, subject to certain limits. In order to qualify for the refund, the individual must comply with certain conditions and the company must be carrying on a qualifying trade (i.e. manufacturing, certain tourism activities etc). The company must also be certified by an appropriate agency such as a County Enterprise Board.

European Commission approval for the schemes has been granted subject to a small number of amendments being made to the legislation governing the schemes. The Minister intends to bring forward these amending provisions by way of a Regulation under the European Communities Act 1972.

Firstly, the legislation will provide that medium-sized enterprises at expansion stage located in non-assisted areas (essentially Dublin and the mid East region) will be excluded from the schemes. The Community Guidelines do not permit State aid for such enterprises unless there is clear evidence of an equity gap for these enterprises in these areas. Such evidence is not currently available. However, such companies may qualify if in seed or start-up phase.

The European Commission’s Regional Aid Guidelines govern the areas in which EU Member States may grant regional aid, more commonly known as investment aid. Investment aid is intended to promote the economic development of certain disadvantaged areas within the European Union in order to redress regional disparities. The profile of the relevant regions in Ireland was set out in a new regional map of defined assisted and non-assisted areas, which was announced in late October 2006. These definitions also apply to risk capital assistance under EU Guidelines.

Secondly, the legislation will provide that companies that avail of the BES or SCS schemes will only be eligible for reduced rates of other forms of State aid (from Enterprise Ireland for example, or from other State agencies). The maximum aid levels (for these other State aids) will be reduced by 50% for companies located in non-assisted areas and by 20% for companies located in assisted areas. The Community Guidelines provide for this reduction where enterprises can utilise a number of State aid sources in order to raise finance.

Approval from the European Commission was required under Article 88 (3) of the EC Treaty.

Extract from Minister’s Budget 2007 speech

Over the past ten years we have refocused the Business Expansion and Seed Capital schemes to ensure that they channel funds to help transform and modernise our small business sector and improve our national competitiveness. These schemes are due to expire on 31 December and have been specifically reviewed at my request. Hundreds of small businesses using these schemes were consulted and asked for data and for their views on the schemes. Many of these firms using BES are ordinary small to medium-sized manufacturing companies in various parts of the country. They make a vital contribution to job creation and to maintaining our competitiveness.

On foot of this review, and the suggestions of groups such as the Small Business Forum, I am announcing an extension of these schemes for a further seven years and I am raising the ceiling per company on total BES investment from €1 million to €2 million. The annual limit on BES investment per investor, which has not been increased since 1984, is being raised from €31,750 to €150,000. In the case of the Seed Capital Scheme, the annual investor limit is being increased to €100,000. I am increasing these limits in order to bring vital risk capital to the small business sector. As these schemes are approved State aids, their continuation and the changes proposed will require the approval of the European Commission. The full year cost of these measures is estimated at just over €25 million.

Review of the BES and SCS

A copy of the review of the schemes carried out prior to Budget 2007 by the Department of Finance is available on the Department’s website at http://www.finance.gov.ie/documents/publications/Reports/BESSCSReport.pdf.