Finance Acts 2018 and 2019: The New EII Rules
Significant changes to the Employment and Investment Incentive (EII) and Start-Up Relief for Entrepreneurs (SURE) were introduced in Finance Act 2018 and further amended in Finance Act 2019 as a result of several factors, including the introduction of the General Block Exemption Regulation (GBER) and the recommendations of the Indecon independent review of the schemes,1 which focused primarily on administrative changes to improve the efficiency and cost-effectiveness of the scheme and policy measures to increase uptake of the reliefs. This article sets out the main changes to the EII introduced by the last two Finance Acts.
Finance Act 2018
Section 25 of Finance Act 2018 introduced a complete overhaul of how EII relief is claimed. It also aligned our domestic legislation with State Aid rules as set out in the GBER. The main changes were:
- There was a move to self-certification by the companies raising EII finance, rather than applying to Revenue for the requisite certificates to be provided to investors to claim the relief. The purpose of this change was to address delays in processing applications, enabling investors to apply for their tax relief earlier.
- Application to Revenue for advance “outline approval” is now restricted to questions relating to the GBER, such as whether an undertaking is a “firm in difficulty” or whether enterprises are linked or partner enterprises within the meaning of the GBER.
- Greater clarity has been given on the ability of companies engaged in R&D to be EIIqualifying companies.
- Certain preferential rights can attach to shares, whereas previously only ordinary share capital qualified for the relief. Note that this extension applies only to the EII and not SURE.
- The Start-up Capital Incentive (SCI) for micro companies was introduced, which relaxes the Finance Act 2017 connected-party rules for family members and connected parties investing in a founder’s company. The SCI does not extend to a direct investment by a founder. Instead, they can apply for SURE, a refund of PAYE deducted at source in the previous six tax years, on a personal investment in their company.
- Permitted investments by designated funds were expanded to non-EII investments, and they were no longer limited to being closed funds.
- The relief was extended to 31 December 2021.
The GBER and the New EII Legislation
The new legislation integrates the EU State Aid GBER rules2 into TCA 1997. A RICT3 group is defined as the company raising the EIIS/SURE/ SCI funds together with its linked enterprises and partner enterprises. The significance of this is that not only the fundraising company but also its linked and partner enterprises need to be examined to determine whether a funding round qualifies for the EII. This can be an onerous task where the connections between enterprises, which can include sole trader and partnership structures, are not entirely obvious and the companies are not in a formal group relationship.
It is especially complex where connections have to be traced through natural persons (human beings). An individual might have a tenuous connection to another company that at first glance is not in a group, but with further investigation it might be found that it is a supplier or customer – “upstream or downstream”, to use GBER language – of the EII company.
Being in a RICT group has the following significance for EII purposes:
- The RICT group as a whole must be an SME on the date on which the eligible shares are issued. If there is an entity in the RICT group that is a large entity, it might result in the claimant company not being a qualifying company for EII purposes.
- No company in the RICT group can be listed or plan to float at the date on which the EII shares are issued.
- Under the Deggendorf Principle, no entity in the RICT group can be the subject of an outstanding European Commission recovery order at the date on which the EII shares are issued.
- An EII investment is an “initial risk finance investment” only if it takes place within seven years of the RICT group’s first commercial sale. If there is a long-established entity in the RICT group, this may prohibit the raising of EII-qualifying funds unless the company can satisfy the conditions of the round being “expansion risk finance” or “follow-on risk finance”, to which different rules apply.
- Throughout the relevant period, being the four years after the date on which the shares are issued, no entity in the RICT group can have any amount not paid up on its issued share capital.
- Under the old EII rules, a receipt of value such as a redemption of an investor’s shares by the EII company would result in a clawback of the relief. Under the new system, a receipt of capital in such circumstances from any entity in the RICT group will trigger the clawback.
- EII relief is not available to an individual who is connected with the EII company. An individual is deemed to be connected with an EII company if he or she or an associate is a partner, director or employee of the EII company or any company in the RICT group or has an interest in the capital of the EII company or any company in the RICT group.
Technical amendments to definitions and other aspects of the relief included:
- The definition of “professional services”, which are not qualifying trades for EII purposes, was aligned with the new definition set out in the KEEP legislation (s128F TCA 1997), whereas the previous definition had been based on the legislation on the close company surcharge for professional services. The definition does not list “engineering” as a professional service, recognising the importance of high-tech companies that require early-stage finance to execute their business plans.
- Under the pre-Finance Act 2018 legislation, there were several definitions of the “relevant period”, depending on the context in which it was used. From 1 January 2019 there is only one much simpler definition, being the period beginning on the date on which the shares were issued and ending four years
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This article first appeared in Irish Tax Review, Vol. 33 No. 1 (2020) © Irish Tax Institute