The scope BUSINESS EXPANSION SCHEME (BES), which has been in operation since 1984, includes a scheme to provide a refund of tax already paid by an individual who sets up and takes employment in a new qualifying business.
Known as the Seed Capital Scheme, it gives income tax relief to those who invest capital in qualifying Irish companies thus enhancing the ability of companies to attract outside investment. The tax relief is given for the year in which the investment is made.
The relief is set to end on 31st December, 2006.
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The purpose of the scheme is to give any person who is an employee, an unemployed person or were made redundant recently and are interested in starting their own business an opportunity to avail of the tax refund to which they may be entitled under the Seed Capital Scheme.
An employee who leaves employment and invests by means of shares in a company which carries on a new business, may claim a refund of income tax paid in previous years. An unemployed person may also avail of this facility.
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You could receive all the income tax you have paid over six years, if your investment is big enough.
You can select the tax years for which you may claim refunds from any or all of the six years prior to the year of investment. Your investment must be claimed up to the extent of your total income in each of the selected years (subject to a max. of €31,750). There is no facility available where the investment can be spread over a number of years so as to utilise personal allowances in each year.
For each of the selected years, the refund is limited to the tax you have paid, with an upper limit in any year of the tax paid on €31,750.
The refund may be claimed immediately the company starts to trade.
If you have already received BES relief for any of the six years selected the amount of the relief available to you in that year is the difference between €31,750 and the amount of the original BES investment.
You may obtain a refund in this manner for two investments in the company made within a three year period. Both investments, however, must be made in the same company and both must be made after 2 June, 1995. Your total investment is subject to an overall maximum refund of the tax paid on €182,240.
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The Investor
The scheme is designed for those who are or were in PAYE type employment. To ensure that this intention is achieved the sources of your income over the four tax years immediately before the year in which you invest in the company are reviewed. In the tax year immediately before the year in which you invest, your income may come from any source (that is, it may be from self-employment, rental, investment, PAYE or other). In the other three tax years, your non PAYE income should not exceed the lower of €25,000 or your total PAYE type income.
These income limits do not apply in the case of an individual who invests in a company which is set up to trade on an exchange facility established in the Custom House Docks Area.(now no longer a qualifying trade)
You must enter into a full-time employment contract for at least one year with the company as an employee or a director starting either within the tax year in which the investment is made or if later, within 6 months of the date on which the relevant investment is made.
Your investment in the company may be made in two stages, the second investment must be made within two years following the tax year in which your first investment is made. The facility to claim relief under the scheme in respect of a second investment is only available to investors who make both investments in a qualifying company on or after 2 June, 1995.
It should be noted that where a second investment is planned the scheme will only be available up to 31 December,2006.
You must buy shares in the company.
You must acquire at least 15% of the issued share capital of the company and you must maintain the level of your shareholding at this percentage for at least two years, even if the share capital of the company should expand. This condition will apply in the case of both a first and a second investment.
The Company
The company must be set up with the intention to carry on qualifying trading operations. Qualifying trading operations are
(1) the manufacture of goods
(2) the operation of certain tourist traffic undertakings
(3) internationally traded services
(4) certain activities which have the potential to become internationally traded services
(5) the cultivation of mushrooms
(6) the micro-propagation of plants and plant cloning
(7) the cultivation of horticultural produce in greenhouses
(8) research and development activity which is undertaken with a view to carrying on certain of these qualifying trading operations and which are certified as such by an industrial development agency
(9) commercial research and development activities
(10) The production, publication, marketing and promotion of a qualifying musical/video recording
The company must obtain a certificate from an appropriate body or person certifying that the qualifying trading operations to be carried on by the company will be a bona-fide new venture, which having regard to certain criteria may be eligible for grant aid or financial assistance from the certifying body or person. The grant aid or financial assistance requirement does not apply to the activities listed at (6) above.
It should be noted that the actual payment of a grant or the receipt of an equity investment from one of the industrial development agencies, is required in the case of internationally traded services. In the case of activities which have the potential to become internationally traded services, an industrial development agency must have provided financial support of not less than €2,540 towards the carrying out of a feasibility study by a person approved of by the agency into the commercial viability of the services to be rendered.
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Manufacturing generally
Enterprise Ireland, SFADCo, Udaras na Gaeltachta or County Enterprise Boards, as appropriate.
Fish farming (Aquaculture) and fish processing
An Bord Iascaigh Mara.
Internationally traded services and services with the potential to be internationally traded services
Enterprise Ireland, SFADCo, Udaras na Gaeltachta or County Enterprise Boards, as appropriate.
Tourist traffic undertakings
Failte Ireland.
Micro-propagation of plants, plant cloning, mushroom and horticultural cultivation
The Minister for Agriculture and Food.
Activities to be carried on in an exchange facility established in the Custom House Docks Area
IDA - Ireland.
Commercial research and development
Enterprise Ireland, SFADCo, Udaras na Gaeltachta, or County Enterprise Boards, as appropriate.
Musical/Video recordings by a new artist produced in the State
The Minister for Arts, Sport and Tourism.
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You must not within the 12 months before your first investment in the company, have held either directly or indirectly, more than 15% of the share capital or of the loan and share capital of any other company, or 15% of the voting power in any other company.
However, this prohibition is waived where you own more than 15% of only one other company provided that:- - the turnover of the other company in each of that company’s three accounting periods prior to the company’s accounting period in which the investment is made in the seed capital company did not exceed €127,000, and - the other company is a trading company (other than a company trading in land or financial services). This prohibition is also waived where you own more than 15% of a shelf or dormant company.
The company must not have any special trading arrangements with your former employer. Normal business transactions are, however, acceptable, provided these are conducted on the same terms as with any other unrelated company.
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The Seed Capital Scheme forms part of the BES. If you think that you may qualify for the Seed Capital Scheme it is also necessary for you and your company to comply with the requirements of the BES.
The most important of which are
- A company that raises both Seed Capital and BES may raise a maximum of €1,000,000, up to a maximum of €750,000 in any one six-month period.
- The shares issued in respect of your investment must not carry any preferential rights to dividends, assets or redemption.
- You must not dispose of the shares for at least 5 years.
- You must not enter into any agreement, arrangement or understanding which could reasonably be considered to eliminate the risk from your investment.
- There must be no attempt to pass back your investment to you.
- The company must be an unquoted company resident in the state or is resident in the European Economic Area with an establishment in the state carrying out qualifying activities.
- The company must be regarded as a micro, small or medium-sized enterprise within the European Commission definition for the relevant period.
- The company must not be regarded as a firm in difficulty for the purposes of the Community Guidelines on State Aid for rescuing and restructuring firms in difficulty.
- The company must use the amounts invested for the purposes of qualifying trading operations.
- At least 75% of the income of the company must derive from qualifying trading operations.
- The company (unless it has qualifying subsidiaries) must not control or be controlled by any other company and it must not carry on a trade which is similar to another trade where both trades are under common control.
NO REFUND WILL BE GIVEN IF ANY CONDITION OF THE SCHEMES IS NOT FULFILLED.
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The refund of tax in respect of an investment made can be claimed as soon as the company has obtained the appropriate certificate from the relevant agency and commences to trade. A refund will normally be made within four weeks of receipt of an adequately completed claim. You can help us to meet this deadline by supplying full information.
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Complete an application form (which is available from the appropriate agency) for a certificate and submit it to that agency.
If the agency is satisfied that the company meets its requirements the necessary certificate will be issued if the company has already been incorporated.
If the company is not yet incorporated a conditional certificate will be issued.
The agency will also issue the tax refund application forms RINE C and RINE I.
When the company has been incorporated, all the shares have been issued (including those you will purchase yourself) and the company has commenced trading, the forms RINE C and RINE I should be completed and submitted.
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If you wish to expand your company in the future you may be entitled to BES relief in respect of any further investment which you may make in the company.
In addition, BES relief may be available to any outside investors you may wish to take into the company provided the investments and the investors comply with the requirements of the BES.
You must, notwithstanding any outside investment in your company, ensure that the continuing conditions of the Seed Capital Scheme are not contravened.
However, this option is not available in the case of trading operations which qualify for the Seed Capital Scheme but not the BES. The activities concerned are:
- trading on an exchange facility established in the Custom House Docks Area, and
- potential internationally traded services.
