On 24 August, the European Commission announced its decision to approve plans included in last December's budget by Minister for Finance Brian Cowen to extend and amend the Business Expansion Scheme (BES) and the Seed Capital Scheme (SCS) for a further seven years until 31 December 2013. The changes proposed will increase the amount of money that firms can raise through the scheme to €2 million, up from the previous limit of €1 million. This is subject to a limit of €1.5 million being raised in any 12-month period. Furthermore, 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 for SCS, up from the previous limit of €31,750.

The BES provides a tax incentive to private investors to invest in long-term equity capital in small and medium-sized companies operating in certain sectors of the economy, which would otherwise find it difficult to raise such funding. Provided an investor holds his or her investment for a minimum period of five years, the BES provides individual investors with tax relief at their marginal tax rate in respect of investments of up to €150,000 a year in companies in certain sectors such as manufacturing, services, tourism, research and development, plant cultivation, the construction and leasing of certain factory buildings and in certain music recording activities.

The European Commission has granted approval for the schemes subject to a small number of amendments being made to the existing legislation. These amendments provide that medium-sized enterprise located in 'non-assisted areas', essentially Dublin, Meath, Kildare and Wicklow, may only qualify for the BES in their seed/start-up phase of development. The Commission's guidelines do not allow state aid unless there is clear evidence of an 'equity gap' constituted by the difference between the supply of risk capital and the demand for such funding by small and medium-sized enterprises at an acceptable price for investors and target companies in these areas. Currently, such evidence is not available but those companies may still qualify in the start-up phase under the SCS. In addition, the new legislation provides that companies benefiting under the BES and SCS schemes will be eligible only for reduced rates of other forms of state aid, such as grants from Enterprise Ireland. The maximum level of benefit from other forms of state aid is reduced by 50% for companies located in 'non-assisted areas' and by 20% for companies in 'assisted areas'.

Nonetheless, Minister Cowen welcomed the news, saying: 'These conditions should not significantly hinder the overall contribution of the BES scheme to economic development and employment.' The approval of the extension of the BES and SCS schemes provides for the extension of a successfully tried and tested mechanism for raising finances for small and medium-sized enterprises in Ireland. It constitutes a welcome response to the Government's proactive, enterprise-friendly initiative to extend the scheme, enabling small and medium-sized enterprises to raise capital and pursue plans for growth and development through structured schemes offering tax relief to investors.

LK Shields Solicitors has a strong track record of assisting clients under the old BES regime and is actively involved in advising clients on new schemes.

For further information please contact David Williams.