Call for continuation of tax incentives for tech firms

29 Mar 2005

IBEC-backed lobby group the Irish Software Association (ISA) has called on the Government during its current taxation review not to curtail tax incentives that are vital to supporting the growth of indigenous software companies.

The company cited schemes such as the Business Expansion Scheme (BES), Seed Capital Scheme (SCS) and the Film Relief Schemes as examples of schemes that help indigenous companies to grow.

The ISA says it welcomed the decision in the December 2003 budget to extend the BES and the SCS to 2006. The ISA called for a further increase in the company limit available in the BES to €5m and the personal limits of these schemes to be increased to €300,000 per investor per annum to bring the Irish schemes in line with the UK Venture Capital Trust. The UK model, introduced in 1995 to encourage individuals to invest in the UK’s smallest and potentially fastest growing companies, has proved instrumental in encouraging investment.

The ISA also called for the establishment of an internal research and development fund for government departments, local government and semi-state organisations to highlight innovative software systems that would deliver tangible benefits to the running of departments while also supporting innovative and enterprising software.

Further recommendations the ISA has called for include amending legislation governing the tax treatment of employee stock options under a revenue approved scheme, with a view to allowing more schemes to qualify for approval and more employees to benefit.

At present, ISA director Michelle Quinn says only a very small number of companies in the software sector qualify to participate, as the current rules governing the tax treatment of employee stock are very restrictive.

“Despite the recent slowdown in the global economy, opportunities exist for Ireland to continue to develop software companies who are capable of dominating niche markets,” says Quinn.

“However, the sector is now facing significant challenges including lack of early stage funding and increasing threats from emerging low cost software economies. If we acknowledge these challenges and develop initiatives to ensure that conditions exist to foster the emergence of new software companies and help grow existing software companies, we will be in a strong position to dominate global markets and ensure that Ireland remains the largest exporter of software in the world.”

According to Gerry Jones, a technology entrepreneur and a member of the ISA’s taxation group, a pivotal element in Ireland’s continued economic prosperity is the development of substantial numbers of indigenous companies with a capacity to engage in high value added activity.

Jones lamented that access to funding between the stage where the original concept or idea for a business is conceived and the point at which the company begins to grow and develop export markets is seen to be one of the largest hurdles for start-up companies. In order to bridge that gap, early stage companies must have access to finance. To date, the BES and the SCS have allowed start-ups to bridge that gap and have played a vital role in supporting job creation in Ireland.

Jones said: “High growth businesses in Ireland continue to face difficulties in raising capital. For those companies not yet generating sufficient cash flow to service debt payments, equity finance is more appropriate.

“However, there is a structural gap in the market for companies seeking relatively modest sums of risk capital. This gap is most acute for companies seeking equity between €500,000 and €3 million per round. Such sums are beyond the financial means of most individual investors and are also too small to attract mainstream venture capital funding,” Jones concluded.

By John Kennedy