EII CPD Webinar - BVP
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EII CPD WEBINAR Proudly presented by 1 The Impact of the 2019 Finance Act on the EII Scheme
Transcript of EII CPD Webinar - BVP
EII CPD WEBINAR
Proudly presented by
1
The Impact of the 2019 Finance
Act on the EII Scheme
AGENDA
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
INTRODUCTION TO BVP INVESTMENTSInvestment manager regulated by Central Bank of Ireland
Collective Investment Scheme
Designated Investment Fund (DIF)
Based in Dublin, Ireland
Founded in 2004
One of Ireland’s leading Cleantech and Impact Focused Fund Managers:
Creating a Sustainable Global Society
Transforming through Digital Technology
Building a Healthy World
Empowering Humanity
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MEET THE TEAM
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David Smeed
Non-Executive Director
Elliott Griffin
Managing Director
Conor Duggan
Investment Director
Gillian Cregan
Financial Controller
Conor Toolan
Investment Advisor
Ray O’Neill
Investment Advisor
Andrew McGreal
Investment Manager
David Gavagan
Non-Executive Chairman
WHAT QUALIFIES US TO GIVE THIS COURSE?13 years managing EIIS Funds (since 2007)
€47 million raised to date
Over 600 individual EIIS investors
Invested in over 40 Irish companies
Active in improving the scheme
Submissions to Revenue Commissioners
Expert team with mix of finance & industry experience
Private placements
Wind projects
Portfolio companies
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€47m
Funds raised to date
€4m
EII Wind
€14m
Project Bonds
€29m
EII Funds
RECENT BVP INVESTMENTS
BVP’s 2019 EIIS Fund has invested in the following companies in 2020:
Provides on-demand grocery delivery through a smartphone app. Now operating in Dublin, Cork and Bristol
Builds human-powered technology for people who supply and protect the worlds supply of quality information
Legal process outsourcing company who are bringing a unique service offering to the legal world
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Companies in closing process
Waste Management Company Windfarm Medical Device company
2019 EIIS ACTIVITY
Supervisory Role
• Hold management to account
• Provide challenge
• Monitor financial reporting and overall compliance
• Seek assurance that strategy and performance are on track
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Stewardship Role
• Guide and shape the business
• Help set strategy
• Establish the company culture, values and ethics
• Determine performance targets
INVESTMENT MANAGER FIDUCIARY OVERSIGHT
HISTORY OF EMPLOYMENT AND INVESTMENT
INCENTIVE SCHEME (EIIS)
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
WHAT IS EIIS?
The Employment and Investment Incentive Scheme (EIIS)
Source of equity funding for Irish small and medium-sized enterprises (SMEs)
Revenue scheme
Tax relief aimed to encourage individuals to provide equity based unsecured finance to trading companies with the potential for capital appreciation
Investor claims tax relief as a deduction from total income. Reduction of individual income tax liability but not PRSI or USC
Entire amount of relief claimed upfront
Investment must be held for a minimum of four years
In 2018 €48m+ invested in 37 companies through EIIS
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EIIS LEGISLATION
The EII scheme is subject to Irish and EU legislation
The three regulations that dictate the operating rules of the EII scheme are:
1. Part 16 Taxes Consolidation Act, 1997 (as amended)
• Income Tax Relief for Investment in Corporate Trades is the main body of legislation applying to the EII scheme.
2. General Block Exemption Regulation (GBER)
Incorporated in the Finance Act 2015, it integrated EU regulations on allowable state aid.
Have heavily influenced the 2018 and 2019 Finance Act amendments to the EII scheme.
3. Designated Investment Funds Act, 1985(as amended)
This applies to rules surrounding approved EIIS Designated Investment Funds
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HISTORY OF BESOriginally called Business Expansion Scheme (BES)
First introduced in 1984
Incentive to private investors to invest equity in companies
Focus on small to medium-sized enterprises (SMEs)
Tax relief of 41% upfront
5 year minimum holding period
More restrictive in terms of qualifying sectors
Self-assessment qualification process
Revision of the scheme over the years
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HISTORY OF EIISCurrent name is Employment and Investment Incentive Scheme (EIIS)
Launched at end-of-year 2011
€150,000 cap in tax relief per investor per annum
€250,000 cap from Jan 1st 2020 onwards
Broader set of sectors qualify
Initially a 3 year minimum holding period
4 year minimum holding period from 2015 onwards
2-step qualification process
40% tax relief upfront, formerly two tranches of tax relief
Businesses can raise up to €5 million in any 12 month period and €15 million in its lifetime
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Source: Revenue Statistics & Economics Research Branch
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Growth in EII investors choosing the EII fund managers
HISTORICAL DATA INVESTORS
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Source: Revenue Statistics & Economics Research Branch
HISTORICAL DATA INVESTEE COMPANIES
TIMELINE OF EIIS CHANGES
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• 21/11/2011 – The Employment and Investment Incentive (EII) is launched. It ran in tandem with the Business Expansion Scheme
(BES) until the 31/12/2011.
• 01/01/2012 – All share issue from this point are in EII. The BES is ceased.
• 01/01/2013 – The incentive is extended until the 31/12/2020. The operation of hotels, guest houses and hostels is now a
qualifying trade subject to certification by Fáilte Ireland for share issue after this date.
• 15/10/2013 - The first tranche of EII relief was removed from the high earners restriction from share issue dated between
15/10/2013 and 31/12/2017.
• 01/01/2014 – The higher rate of income tax was lowered from 41% to 40%. To reflect this change, the rate of initial relief
was changed from 30/41 of the investment to 30/40 of the investment and the additional relief was changed from 11/41 of
the investment to 10/40 of the investment for investments dated 01/01/2014 onwards.
• 13/10/2015 - Internationally Traded Financial Services is now a qualifying trade for share issue dated 13/10/2015
onwards. The operation of Qualifying Nursing Homes is now a qualifying trade for share issue dated 13/10/2015 onwards.
The limits on funds raised under the incentive were increase from €2,500,000 to €5,000,000 in any 12 months period and
from €10,000,000 to €15,000,000 for the lifetime of the business. Medium sized companies based in non-assisted areas of
the State, that are beyond the start-up phase, can now qualify for the incentive for share issue dated 13/10/2015 onwards.
Companies are now required to have their tax affairs fully up-to-date in order to qualify. The incentive was brought in line
with the EU’s General Block Exemption Regulations on State aid (GBER) by restricting when a company can make its first or
subsequent applications to the incentive.
• 2/11/2017 – individuals connected with the company are no longer eligible for relief under EII.
KEY TAKEAWAYS
FROM HISTORY OF SCHEME
Business Expansion Scheme (BES) is the old name for EIIS (Employment Investment and Incentive Scheme)
Equity investment (not debt)
Revenue approved scheme
Founded in 1984 with revisions over the years
Support growth of small and medium sized Irish companies
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INVESTING IN EIIS IN 2020
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
WHO IS EIIS SUITABLE FOR?
An individual with a taxable income liability in the year the EIIS investment is made
Taxable income includes
PAYE earnings
Rental income from property held in a personal capacity
Other investment income e.g dividends
Pension income
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EII SCHEME HIGH LEVEL PROCESS – DIRECT
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Investment in BusinessPrivate Investors
Broker/advisor
Revenue
1a
1b
2
3
Investment Through Broker
Direct Investment
EII Certificate
EII Statement of Qualification
EII SCHEME HIGH LEVEL PROCESS – VIA DIF
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Equity Investments in
CompaniesInvestment
Manager
Private Investors
Broker/advisor
Designated
Investment Fund
(Trustee)
Revenue
1a
1b
2 3
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Distributions
Direct EIIS Investment
EIIS Investment Through Broker
Shares
EII
Certificate
EII Statement of
Qualification
Investment
in Companies*
*Investments through a designated investment fund are executed through a Trustee.
The due diligence is completed by an approved designated investment fund manager.
WHAT IS A STATEMENT OF QUALIFICATION?A statement by the company to the effect that
The company is a qualifying company
The investment is a qualifying investment within the meaning of Section 496 of the TCA
Contains the company and investment details and any such other information as the Revenue Commissioners may reasonably require
Tax relief after they have spent 30% of the investment amount
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PRACTICAL ILLUSTRATION
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2020 Income & Tax Payable
With EII Without EII
Gross Pay €78,000 €78,000
EII Investment €40,000 -
Taxable Pay €38,000 €78,000
€35,300 @ 20% €7,060 €7,060
Remainder @ 40% €1,080 €17,080
Gross Tax Payable €8,140 €24,140
Less:
Tax Credits €3,300 €3,300
Net Tax Payable €4,840 €20,840
Tax Savings through
EII
€16,000
Company A
Company spends 30%
of investment (must be
within 4 years)
Within 60 days of
spend, Company sends
Form SQEII 3 to BVP
and Form RICT to
Revenue
Investment Amount (€)Form RICT
BVP collects Form SQEII
3 from all companies
and issues a
consolidated statement
to investors
Consolidated Statement
Note: The company-specific process will be
repeated for however many companies receive
investments through the Fund.
Typically, there are four investments per Fund.
Process of Revenue Approval
1. 2. 3.
4.
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TIMELINE OF REVENUE APPROVAL EXAMPLE
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Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec
31st Jan:
Company
receives EII
investment
30th Apr:
Company
spends
30% of EII
investment
31st May:
Forms
issued to
BVP and
Revenue
31st Mar:
Company
receives EII
investment
30th June:
Company
spends
30% of EII
investment
15th July:
Forms
issued to
BVP and
Revenue
30th June:
Company
receives EII
investment
31st Oct:
Company
spends
30% of EII
investment
30th Nov:
Forms
issued to
BVP and
Revenue
Dec ‘21/Jan ‘22
BVP issues
consolidated
Statement of
Qualification to
investors
Company A
Company B
Company C
EIIS DESIGNATED INVESTMENT FUNDS
Investment Managers authorised by Central Bank under Section 10 to manage EIIS designated investment funds (“DIF”)
Also recently required to register as Alternative Investment Fund Managers (“AIFM”)
A designated investment fund is an investment fund that has been designated by the Revenue Commissioners in accordance with the rules laid down in Section 508 of the Taxes Consolidation Act 1997, as amended
The Investment Manager will invest the funds raised in the year after the DIF is raised, at which point shares will be issued
Revenue will issue the Fund with the Designated Fund Reference Number (“DFRN”)
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DESIGNATED INVESTMENT FUNDS
The Revenue Commissioners shall designate a fund if they are satisfied that:
(a) There is a Trustee in place for the DIF
(b) under the terms of the trusts it is provided that:i. the entire fund is to be invested without undue delay in eligible shares,
ii. pending investment in eligible shares, any moneys subscribed for the purchase of shares are to be placed on deposit in a separate account with a bank licensed to transact business in the State,
iii. any amounts received by means of dividends or interest are, subject to a commission in respect of management expenses at a rate not exceeding a rate which shall be specified in the deed of trust under which the fund has been established, to be paid without undue delay to the participants,
iv. any charges to be made by means of management or other expenses in connection with the establishment, the running, the winding down or the termination of the fund shall be at a rate not exceeding a rate which shall be specified in the deed of trust under which the fund is established,
v. audited accounts of the fund are submitted annually to the Revenue Commissioners as soon as may be after the end of each period for which accounts of the fund are made up,
vi. the managers, the trustees of the fund and any of their associates are not for the time being connected either directly or indirectly with any company whose shares comprise part of the fund,
vii. any discounts on eligible shares received by the trustees or managers of the fund are accepted solely for the benefit of theparticipants,
viii. if a limit is placed on the size of the fund or a minimum amount for investment is stipulated, any subscriptions not accepted are to be returned without undue delay, and
ix. no participant is allowed to have any shares in any company in which the fund has invested transferred into his or her name until 4 years have elapsed from the date of the issue of the shares to the fund.
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BENEFITS OF DESIGNATED INVESTMENT FUNDS
Investing in a range of companies diversifying risk
Professional due diligence on investments
Oversight of investment by investment manager
Stronger legal representation
Portfolio reporting
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PRACTICAL IMPLICATIONS FOR BROKERS AND ADVISORS
For direct investments – look for company own due diligence on their reasons for qualification
For investments via a designated investment fund – look for diversification in choice of target investments
For both – look for commitments to provide investors with preference shares (which have priority over founders’ shares)*
*Possible conflict for direct investments
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INVESTOR CONSIDERATIONS
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
PRACTICAL IMPLICATIONS FOR INVESTORS
Can expect quicker turnaround in claiming tax relief
Increase in company responsibility should reduce risk on non-qualification
More choice of funds is good for investors
More diversification within funds should reduce risk for investors
Additional investor protections should increase the ability of the investor/DIF to exit investment and get a return on capital after the minimum holding period of 4 years
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KEY TAKEAWAYS FROM INVESTOR CONSIDERATIONS
40% provided upfront
Minimum holding period of 4 years
Must be equity and cannot take secured
position
Designated Investment Fund v Direct Investments
QUALIFYING COMPANIES
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
QUALIFYING COMPANIES
For a company to raise funding that will provide EII relief to investors, must be a “qualifying company”
Qualifying company designation is based on the activities of the company itself and the activities of other businesses within the RICT group
A RICT group is made up of a qualifying company and all of its partner businesses or linked businesses
The qualifying company can be either
A trading company itself, or
The holding company of a trading company
Company and RICT group must meet conditions throughout the 4-year relevant period:
Company must be either tax resident in Ireland, EU or EEA Member State
Must carry on relevant trading activities in the State or if carrying our R&D+I it must intend to carry out relevant trading activities in the State
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INVESTMENT IN TRADING
COMPANY
The investment can be made in:
A company that exists wholly for the purposes of carrying on relevant trading activities
Must not carry out any other activities, other than incidental activities
Cannot carry on a business that consists partially of a trade and partially of professional services
A holding company that exists either wholly for the purpose of being a holding company or wholly for the purposes of both carrying on relevant trading activities and being a holding company
The company cannot be in control of any company that is not a qualifying subsidiary
The company cannot be under the control of any other company
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QUALIFYING SUBSIDIARIES
Two types of qualifying subsidiaries a qualifying company can have:
Subsidiaries which trade in their own right
Subsidiaries which carry out support functions for the qualifying company’s trade
Subsidiaries that carry out a trade in their own right must be a resident in Ireland or an EU or EEA state and must carry out, or intend to carry out, relevant trading activities from a fixed place of business in the State
Subsidiaries carrying out support functions can be established anywhere in the world, assuming the business carries on relevant trading activities and can only involve
Purchasing or selling goods or materials for use by the qualifying company or its subsidiaries
Providing services on behalf of the qualifying company or its qualifying subsidiaries
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QUALIFYING PURPOSE
The company must intend to use the amounts raised for a “qualifying purpose” within 4 years of share issue
A qualifying purpose is spending the amounts either
For the purposes of carrying out relevant trading activities, or
Where the company has not yet commenced to carry out relevant trading activities, on research, development and innovation (R&D+I)
The amounts spent must contribute to the maintenance or creation of employment
The amounts cannot be spent on buying a trade or shares in a company, with the exception of shares in a qualifying subsidiary
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ELIGIBLE SHARES
Eligible shares carry a right to a preference dividend, granting investors liquidation preference rights
Eligible shares are redeemable
Investments with agreements that substantially reduce the risk to the investors are prohibited (e.g. personal guarantees and security over assets)
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RICT GROUP
Wording refined for a connected parties
“Linked businesses” >50% control
“Partner businesses” >25% shareholdings
Challenges where promoters of the company raising EIIS involved in a Linked or Partner business particularly where operating in “Adjacent market”
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UNDERTAKING IN DIFFICULTY
A RICT group, which is less than 3 years old, cannot be an “undertaking in difficulty”
An “undertaking in difficulty” is a RICT group that will almost certainly go out of business in the short or medium term
Where more than half of its share capital and share premium has disappeared as a result of accumulated losses
Irish GAAP allows companies to make choices in preparing their accounts and the company can consider conservative accounting choices they have made
Ex: Expensing R&D when that R&D also met the conditions for capitalisation
Need signed statement by a registered auditor that it would be possible to restate the accounts and what the amended figure would be is sufficient. Actual restatement is not necessary
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TAX RELIEF: COMPANY SELF-CERTIFICATIONThe approval process for qualifying company applications has changed from Revenue review to self-certification by the investee companies and investors
Revenue support is available to Companies seeking confirmation that they meet the qualifying Irish and GBER criteria
Revenue support is available to investors seeking confirmation that they are eligible for tax relief
Statement of qualification can be issued by companies for tax relief after they have spent 30% of the investment
For EII direct investments companies issue a ‘statement of qualification’ to investors to claim tax relief
Companies seeking investment from an EII designated investment fund issue a ‘statement of qualification’ to the designated investment fund manager. The designated investment fund manager consolidates the information for all the companies in the fund and issues a certificate to investors to claim tax relief
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REPORTING TO REVENUE/LOSS OF TAX RELIEF
Where the investment was made through a Designated Investment Fund, the managers of the designated investment fund who have knowledge of a matter which disqualifies a company/connected person individual for tax relief, shall within 60 days of the event, give a notice in writing to a Revenue officer of the event
The Company/Designated Investment Fund is responsible for including details of the qualifying investment in a return to Revenue for the accounting period in which the eligible shares were issued
If the company issues a statement of qualification when they were not qualified, the clawback of tax relief will be chargeable to the Company
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REPORTING TO REVENUE/LOSS OF TAX RELIEF
The company should within 30 days of the share issue date for a qualifying investment provide Revenue through electronic means:
Name of company; Address of company; CRO Number; Amount raised; Investor Name, address PPS; Amount etc.
Revenue may publish this information in accordance with GBER for companies receiving state aid
If the company fails to comply with the above requirements and deadlines, they will be liable for a penalty of €2,000 and €50 per day after the 30-day deadline
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REDEMPTION/EXIT PROCESS
The Manager co-ordinates the Exit of the Fund after expiration of the Minimum Investment Period (4 years) by seeking to make arrangements with the Board of Directors of each of the Investee Companies/projects for redemption of the investment
These may include:
A sale of the shares on the Irish Stock Exchange or any other recognized securities market, if such share are listed;
An acquisition or take-over;
A private placing, e.g. a trade sale
A repurchase or redemption by the Investee Company of its own shares;
A sale of the EII shareholdings to the promoters of the Investee companies;
Pre-2018 Finance Act , the exercise of a call or put option at market value with the promoters of the Investee Companies; and/or
Any other method of realization which may, in the opinion of the Manager, be appropriate at that time
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DISTRIBUTIONS FROM INVESTEE COMPANIES WITH FOLLOW ON EII INVESTMENTS
Capital Redemption Window: Company can redeem shares or purchase shares from any member other than investors within the EIIS minimum holding period subject to following conditions:
Most recent EIIS raised by the RICT group was 18 month prior
The RICT group will not seek to raise EIIS for 12 months after return of capital
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KEY TAKEAWAYS FROM QUALIFYING COMPANIES
Designation of a qualifying company based on the activities of the company or its RICT group
The company cannot control or be under the control of any other companies, except for qualifying subsidiaries
Investment amounts must be spent on relevant trading activities or R&D+I and must ultimately contribute to the maintenance or creation of employment
Relevant trading activities must take place in Ireland or in EU or EEA Member State
A qualifying company cannot be an undertaking in difficulty
2018 FINANCE ACT & 2019 FINANCE ACT IMPACT ON
EIIS
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Qualifying companies
Introduction to BVP
History of Employment and Investment Incentive Scheme (EIIS)
Investing in EIIS in 2020
Investor considerations
Qualifying Companies
2018 Finance Act & 2019 Finance Act impact on EIIS
FINANCE ACT 2019
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Several changes made to the EII Scheme
01Brought into law in December 2019
02EII Scheme will be extended for a further year to 31 December 2021
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HIGH LEVEL CHANGES
Level of Relief: Full income tax relief (40%) be provided in the year in which the investment is made. This compares with prior arrangements where 30% relief is provided upon the initial investment and a further 10% is given after Year 3 subject to certain conditions. This change is effective from 8 October 2019.
Higher investment limit: The annual investment limit was increased from €150k to €250K from 1st January 2020 and up to €500k in the case of those who invest for a minimum period of 7 years.
Relief from Funds**From 1 January 2020, investors in certain designated investment funds (funds that have been approved by Revenue as such) will no longer have a choice as to the year of assessment that the deduction can be claimed. For investments made through all designated investment funds, the deduction will only be available in the year the amount was subscribed to the fund.
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TAX RELIEFProviding all of the conditions of the EII scheme are met, relief on the invested amount is due in the tax year in which the investment is made in the company
Where an investor invests in eligible shares through a designated fund manager (DFM) but the shares are not issued to the fund until the following year, he/she can claim tax relief in the year in which he/she made the investment in the fund.
Qualifying companies need to have spent 30% of the investment on qualifying activities before issuing a statement of qualification. The typical time from investment to issuance of statement is 3-4 months.
EXAMPLE:
Peter invests in a designated investment fund in December 2020. The shares are not issued by the company the designated investment fund invested in until March 2021. Peter can claim tax relief on the EII scheme investment in 2020 [the year he made the investment]
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CLAIMING TAX RELIEF Investors can only claim relief when they have received the statement of qualification from the company or consolidated certificate from the designated investment fund manager
The statement of qualification must be issued by the company within 2 years of the end of the year of assessment
The maximum tax relief claim an individual can make in a year is €250,000
If the investor’s subscription to the EII investment is in excess of €250,000 or they have insufficient total income to offset the relief, the amount that was not offset will be carried forward
If relief is carried forward and further relief is available from an investment in the subsequent year, the oldest relief is used first. The final year of assessment for which relief can be carried forward is 2021
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2019 FINANCE ACT: SUMMARY OF RECENT EII CHANGES
Before
Two tranches of tax relief: 30% in year of investment, 10% after 4-year min holding period
After
40% tax relief in the year of investment
Maximum annual investment of €150,000
Maximum annual investment of €250,000
Maximum investment of €500,000 for those who invest a minimum period of 7 years
KEY TAKEAWAYS FROM 2019 FINANCE ACT
Process uses self-certification leading to faster EII approval
Changes are good for investors- shares rank ‘pari passu’ with strategic investors
Companies raising EIIS need to act responsibly
Look out for mixed venture capital funds with % EIIS offering
Tax relief can now be claimed entirely upfront
Investments of up to €250,000 can offset income for tax purposes
OUTLOOK FOR 2021 AND THE EXPECTED IMPACT ON EIIS
Economic Forecasts suggest that global GDP will grow by circa 5% in 2021
Irish growth in GDP is forecasted to be between 1.4% and 5.6% in 2021
ESRI have stated that they forecast that savings as a % of income in likely to rise to 20% this year from 10.5% in 2019 which could lead to a surge in demand
BVP’s Portfolio Companies have responded very strongly to challenge of Covid-19.
BVP’s investment strategy for 2021 will likely be more conservative than 2020
Community projects and other project type investments allow for further diversification
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THE 2020 BVP EII FUND – OPENING SOON
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THANK YOU FOR ATTENDING!
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Contact Us:
Phone
01-6572900
Website
bvp.ie
*BVP is not a tax advisor. You should always seek independent tax advice before making an investment
