Software industry wants BES expanded

31 Oct 2006

The indigenous Irish software industry has appealed to the Minister for Finance Brian Cowen TD to extend the Business Expansion and Seed Capital Schemes to 2014 as well as increase the personal limit on investors from around €32k today to €250k per annum.

The Irish Software Association (ISA), an IBEC-based body, said this morning that increasing both of these schemes would be fundamental to supporting the indigenous in research and development (R&D) and sales efforts.

The sector, the ISA claims, has the capacity to grow from its present 16,000-strong workforce to 50,000 and deliver revenues of €7.5bn a year to the Irish economy by 2010.

However, to make this happen the Irish Government needs to create the right environment, the ISA said.

The ISA also took the opportunity to remind the Irish Government of the importance of buying IT products and service from indigenous companies to meet the public sector’s IT requirements, which would deliver value for money to the taxpayer as well as boost the reputation of local companies.

The current Business Expansion Scheme (BES) and the Seed Capital Scheme (SCS) are due to end on 31 December, 2006. The ISA is seeking an extension of both schemes to 2013 and an increase in the investment limits that the company can raise to €1.5m (from existing limit of €1m) and an increase in the personal limit to invest €250k per annum (from current rate of €31,750).

The ISA believes this will encourage individuals to invest directly or indirectly in a range of small high-risk companies by offering income tax relief.

Access to funding between the business idea stage and the later stages of growth and export is the largest hurdle for start-up companies.

Venture capitalist and investment firms that spoke with last week agreed that there is a serious lack of early-stage funding for firms seeking between €500k and €2m in venture capital.

“BES and SCS funding is particularly important for software start-ups and early-stage companies which are finding it virtually impossible to access the financing they need in order to start, grow and in some cases survive,” Michele Quinn, director of the ISA said.

“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 of between €500k and €3m per round. To date, the BES and SCS have allowed start-ups to bridge that gap and have played a vital role in supporting job creation in Ireland,” Quinn pointed out.

She said that over 50pc of software start-ups have relied on a combination of both BES and SCS funding over the past few years. The schemes have been availed upon by many successful Irish software companies, including Ocuco, Rococo and many of the other IONA technology spin-offs.

The ISA also recommended improvements to the existing R&D tax credit scheme. Ms Quinn said: “If we are to continue to compete globally, we must increase the amount invested in R&D.

“The tax credit scheme is in its third year of operation. While the ISA supports the scheme in principal, changes are needed to improve the way it operates and make it more accessible for SMEs [small and medium-sized enterprises]. It is currently more suitable to larger, established, tax liability companies who are already carrying out R&D.

“The Irish software industry is recognised worldwide for being innovative. It is critical that this innovation is supported through Government policy. Although the existing R&D tax credit can be carried forward indefinitely, this is of little or no benefit to companies not making taxable profits to grow their R&D activities, eg software companies in the development phase.

“To address this, the ISA is recommending an alternative to the broader incremental expenditure approach through the introduction of a tax credit offering on the employer’s PRSI-type payments for technical personnel. Given that wages and salaries typically account for approximately 50pc of R&D costs, this is an effective method of reducing the impact of such costs.

“On the tax scheme, the ISA is also recommending the extension of the base period, which is used to calculate the size of the tax credit, from three to seven years,” Quinn said.

By John Kennedy