Review of Seed Capital Scheme
1. The Seed Capital Scheme (SCS) was introduced in the 1993 Finance Act. The Department of Enterprise, Trade and Employment has undertaken a review of the scheme and this paper is based on this review and is being submitted to the TSG for it’s information and to seek it’s views on the Seed Capital Scheme.
2. The 1993 Finance Act adapted the Business Expansion Scheme (BES) legislation to provide for the introduction of the SCS. The SCS was designed to assist employees who leave employment and open a new business to claim a refund of tax paid in the previous five years. An unemployed person or a person who has been made redundant may also avail of the scheme. To qualify for the SCS the company must be engaged in BES type activities, for example, manufacturing, tourism projects etc. A full list of the activities that are allowable for the SCS are set out in appendix I. In essence, the SCS is a subsidy on risk investment and individuals wishing to avail of the scheme must take up full-time employment in the venture with no income support to reply on. As mentioned above the SCS runs in tandem with the BES and as with the latter is due to finish on 5 April 2001 unless extended.
3. To qualify for a refund an individual must invest in his/her own business. The size of the tax refund depends on the amount of the individual’s investment. For any particular year the refund is limited to the tax the individual has paid in previous years subject to an investment limit of £25,000 per annum with an overall investment limit for the five years of £125,000. Accordingly, the scheme benefits those who have paid the highest taxes and who make the biggest investment. The refund of income tax can serve the new business as one of or a combination of permanent funding, working capital or, in the short term, a subsidy to current expenditure.
Seed Capital Scheme and the Business Expansion Scheme
4. Unlike the BES, the tax refund in the case of the SCS is based on earnings in previous years. It is not unusual for seed capital projects to also seek BES funds at the same time or, more unusually, later on as the project develops. The restriction on the amount a company could raise under the BES to £250,000 also applied to seed capital projects i.e. the maximum amount they could raise was £250,000. To maintain the momentum of the SCS, it was decided to make the limit for seed capital companies £500,000 of which a maximum of £250,000 could be raised under the BES. A seed capital company can raise the full £500,000 under the SCS provided it can find the necessary qualified investors.
Statistical Information about the Seed Capital Scheme
5. More detailed statistics are set out in appendix II. For the period 1993/94 to 1998/99 nearly £6 million has been refunded under this scheme to 373 individuals and 275 companies. The difference between the number of individuals and the number of companies is a reflection of the fact that some companies have more than one investor. These figures imply that the average refund is £16,000 per individual and the average per company is nearly £22,000.
6. To qualify for the relief applications must be approved by a certifying agency (details at appendix I) e.g. Forbairt. The aim of certifying is to minimise any possibility of displacement,
Companies Trading on an Exchange Facility in the Customs House Docks Area
7. The 1995 Finance Act extended the SCS to traders on FINEX, the futures and options division of the New York Cotton Division. Traders applying for the SCS had to satisfy a number of conditions including the requirement that the FINEX company had an IFSC certificate. Because of the limit on new certificates in the IFSC agreed with the EU, certificates are no longer available for FINEX trading companies and hence they are no longer able to avail of the SCS. While we tried to resolve this problem before the 1999 Finance Bill, it was not possible to do so. However, we undertook to look at the situation again for the 2000 Finance Bill.
Complaints about the Seed Capital Scheme
8. There has been very little correspondence received in recent years in relation to the SCS. The Small Business and Services Forum, which meets under the auspices of the Department of Enterprise, Trade and Employment, have suggested that the SCS should be removed from the BES legislation and a simpler and more accessible tax refund scheme should be introduced. In addition the sectors eligible for the SCS should be extended. However, no specific proposals have been received in this regard.
Main Findings of the Department of Enterprise, Trade and Employment Survey
9. The Department of Enterprise, Trade and Employment wrote to all 182 companies which had received seed capital for the tax years 1993/94 up to and including 1997/98. The details of the companies were supplied by the Revenue Commissioners.
10. Following the initial issue of the survey to the companies in question two further reminders were subsequently sent to non respondents to the initial questionnaire. The results of the survey were as follows:-
11. Aggregating the two classifications yielded a total of 97, or 53% of the entire survey group of 182. Of the 75 companies that responded 30 were in manufacturing, 10 in software and 9 in tourism. The other companies were in a variety of areas including print/packaging, financial services etc.
Performance of Scheme
12. During the five year period covered by the survey, employment for the total survey respondents increased from 292 initial employees to 1,242 at the end of tax year 1997/98. In percentage terms this equalled an increase of 325% in numbers employed. The largest sectoral increases in employee numbers took place in the manufacturing sector, the software sector and the Telecom sector.
13. Of the companies that responded, 24 companies indicated a current turnover of £100,000 or less per annum. 13 companies indicated a turnover in excess of £100,000 per annum but less than £250,000 per annum. 11 companies indicated turnover in excess of £250,000 per annum but less than £500,000 per annum and finally 24 indicated turnover in excess of £500,000 per annum.
14. Of the 75 responses 13 (or 17%) indicated a break-even situation in their latest set of accounts. 25 (or 33%) indicated a loss making position, and 37 (or 49%) of respondents indicated that they were trading profitably.
15. Growth in Employment
1In assessing the growth in employment during the five year period throughout the sample, the employment pattern was analysed by reference to the individual companies represented in the sample as follows:-
During the five year period of the survey 55 or 73% of the respondent companies indicated increased employment during the period, 6 companies showed decreases in employment over the reference period and 14 companies showed static employment over the reference period.
Of the 55 companies which showed increased employment over the five year reference period, 40 of these companies predicted further increases in their projected employment over the coming year. Thus 73% of the number of companies comprising this element of the total response or 53% of the entire sample indicated (a) increased employment numbers during the five year reference period of the survey, and (b) that they would further increase employment numbers in the coming year.
16. Growth in Profitability
In assessing the ongoing trend of profitability reflected by the sample the respondent companies were analysed into those (a) trading profitably, (b) loss making and (c) indicating a break-even position for their latest set of accounts. The results of this exercise indicated that of the 75 respondent companies 36 or 48% indicated that they were trading profitably, 28 indicated that they were loss making, and 11 indicated that they were operating on broadly a break-even situation in their latest financial returns.
Of the 36 companies indicating a current record of profitability 18 (or 50%) indicated that they expected to experience an increase in the rate of their profitability during the next financial year.
17. Perception of schemes value by Applicants
Of the 75 successful applicants under the scheme, 67 indicated that in their view, the support received was critical to the start up of the company. Only 8 respondents indicated that in their view the support was not a critical factor in the start up of the company.
15 respondents indicated that it would not have been possible to set up in business without the financial support received under this scheme.
The survey results would suggest that the approximate cost to the Exchequer in terms of income tax rebate per individual is about £5100, based on the number of employees involved at the commencement of each project.
Of the 75 respondents, 2 only commented in negative terms on the scheme. Both of these responses related to the relatively complex procedures and consequent long time scale involved in the approval process.
18. Conclusions of Department of Enterprise, Trade and Employment’s Survey
The Seed Capital Scheme is a well focused tax incentive in that it provides Exchequer support at the very earliest stage in project development to individuals who wish to establish their own business enterprise.
The scheme has been clearly successful in (a) helping to generate employment, (b) assisting successful business ideas to get off the ground, which might not have succeeded in the absence of this scheme.
The scheme is cost effective from the Exchequer’s point of view. For a small outlay on a per annum basis the Exchequer is making an important contribution in assisting in the start up of many new business operations (a large proportion of them hi-tec operations).
One of the principal reasons why this scheme has been successful is that the modest amount of funding provided through up to five years income tax rebate facilitates leveraging of additional funding from established financial institutions.
The support under this scheme has been particularly relevant for indigenous start up businesses, commencing operations in the software and telecommunications areas.
It is important that this scheme should continue for the future, as it is clearly a significant factor in assisting the start up of business ideas with potential, particularly in the hi-tech field, many of which would have severe difficulty in becoming established without the support from the scheme.
19. From the statistics available from the Revenue Commissioners and the survey carried out by the Department of Enterprise and Employment it would seem as if the SCS is working well. In these circumstances there appears to be no need, at this time to change the scheme. The matter can, of course, be examined again next year if necessary when the future of the BES will be examined. The view of the TSG would be welcome.
Qualifying Trading Operations and Certifying Agencies
Internationally Traded Services
Commercial Research and Development
Certain Tourist Undertakings
Fish Farming (Aquaculture)
The Cultivation of Mushrooms
Micro-Propagation of Plants and Plant Cloning
The Cultivation of Horticultural Produce in Greenhouses
The Production, Publication, Marketing and Promotion of a Musical Recording
Certified by the Minister for Arts, Heritage, Gaeltacht and the Islands.
Seed Capital Scheme Statistics
Tax year Tax Refunds No. of Investors No. of Companies
1993/94 168,559 8 7
1994/95 725,311 48 39
1995/96 654,172 41 31
1996/97 1,646,855 92 64
1997/98 1,221,521 85 65
1998/99 1,576,358 99 69
TOTAL 5,992, 776 373 275
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