Pressure grows to extend life of funding schemes for Irish software start-ups

25 Sep 2003

Earlier this month, the Irish Software Association (ISA), an affiliate to employers’ group IBEC, said the impending end of the Business Expansion Scheme (BES) will have disastrous effects on the software sector. It said start-up software firms found sources of finance such as venture capital funding and angel investors had dried up and many firms were depending on BES investment. The association has also called for the €750k-per-company ceiling for BES funding be raised to €2m. BES financing “plays an essential role in establishing a software start-up, in supporting job creation and in ongoing fundraising in the software sector”, the ISA said.

The future of BES and the Seed Capital Fund (SCF) are still uncertain. Discussions are taking place between the Department of Enterprise, Trade and Employment, the Department of Finance and Revenue Commissioners, but no final decision has yet been made. According to the Department of Finance: “The schemes are due to terminate on 31 December, 2003 and are being reviewed in the context of the forthcoming budget.”

The BES was originally introduced in 1984 as an income tax-based incentive for private investors to invest long-term equity capital in companies, in particular new and smaller companies, operating in certain sectors of the economy, which would otherwise find it difficult to raise such funding.

A recent survey conducted for the ISA found 96pc of respondents believed BES would be integral to funding a new software company. It found 66pc believed BES would be an important factor in future funding rounds for their firms and that 43pc of respondents had used BES funding. “The potential collapse of the indigenous software industry centres on the fact that very few start-up companies can or will be created without the backing of this critical BES funding,” said Cathal Friel, ISA chairman. Friel understood Finance Minister Charlie McCreevy’s “desire to remove asset-backed, minimal-risk tax-based schemes”, but felt software companies were exactly what the BES was set up for — “high risk, potentially high-return businesses aimed at the export market” that could not raise funding because they had no tangible assets. “The failure to retain BES will catapult the Irish software industry back into the dark ages,” said ISA deputy chair Bernadette Cullinan. Immediate and future job losses would result, she said.

Enterprise Ireland has also expressed concern regarding the possible cessation of both schemes. “The BES and the SCS are both part of the pro-business environment and both make a substantial contribution to technology-based sector and start-up companies. Anything pro-business in the current environment is very important,” it said.

The Tánaiste and Minister for Enterprise, Trade and Employment, Mary Harney TD, has also requested the extension of two equity-based tax incentives for entrepreneurs, which are due to cease at the end of this year.

Documents released under the Freedom of Information Act (FoI), 1997, show that the Tánaiste in her Budget 2003 submission last year requested that the Business Expansion Scheme (BES) and the Seed Capital Fund (SCF) be extended for a further three years until 31 December 2006. Although this document dates from last year was told by a department official that the Tánaiste still holds this view.

Documents released under the FoI Act show more than €48m was approved in 343 investments to nearly 2,500 investors in 2002 under the BES. The total tax refund of the BES in 2002 (ie, the total cost to the Exchequer) was €20.7m, an increase of over 23pc since 2000/01. Under the SCS in 2002, €3.4m was invested in 44 companies, with €1.4m being the total tax refunded.

By Lisa Deeney