Introduction
A recent decision of the Tax Appeals Commission (TAC) may have opened the door for older SMEs (in existence more than seven years) that had previously raised finance under BES, SCS, SURE or EII schemes to apply for additional funding under the Employment and Investment Incentive (EII) scheme. Traditionally, the approach adopted by the Revenue Commissioners (Revenue) is to refuse applications for additional funding, unless the applicant’s original business plan that accompanied the BES, SCS, SURE or EII application, also contained analyses of profits, sales and profitability development concerning follow-on funding.
Background
In a determination dated 27 February 2021, the TAC overturned a decision of Revenue (Decision) to refuse to grant EII relief for an investment of €150,000 in new shares issued by the Appellant (Company) on 28 April 2017. Revenue refused the application on the grounds that the Company’s “original business plan” did not foresee the need to raise additional risk finance, which was a requirement under paragraph 6(b) of Article 21 of EU Commission Regulation No. 651/2014, commonly known as the General Block Exemption Regulation (GBER).The effect of the Decision was that investments made by investors in the Company did not qualify for income tax relief available under the EII scheme.
Legislation
Section 494 of the Taxes Consolidation Act 1997 (TCA 1997) provides that a company that does not meet the requirements of paragraphs 5 and 6 of Article 21 of the GBER will not be a “qualifying company” for the purposes of EII relief.
Paragraph 5 of Article 21 of the GBER provides that qualifying companies are companies that at the time of the initial “risk finance investment” are unlisted SMEs and have been operating in a market for fewer than seven years following their first commercial sale.
“Risk finance investment” means State aid granted under an approved EU scheme such as the EII scheme. “Follow-on” risk finance means additional risk finance investment in a company subsequent to one or more previous risk finance investment rounds.
Paragraph 6 of Article 21 of the GBER provides a limit on the amount of risk finance an undertaking can raise under an approved State aid scheme. Paragraph 6(b) provides that for EII relief to apply to follow-on risk finance, the possibility of follow-on investment must have been foreseen in the original business plan.
Paragraph 14(c) of Article 21 of the GBER states that risk finance provided to qualifying companies shall be based on a viable business plan, containing details of product, sales and profitability development, establishing ex-ante financial viability.
Revenue’s approach was that it was not sufficient that the possibility of follow-on investment was simply foreseen in the original business plan, to comply with paragraph 6. Instead, Revenue concluded that in accordance with paragraph 14(c), the intention to apply for follow-on investment must be accompanied by detailed analysis and projections.
Evidence
The Company’s directors gave sworn evidence that the Company had prepared a business plan in or around 1992 to support an application for BES relief, but the business plan was since irretrievably lost. The Company submitted into evidence an appendix to the business plan that included a Profit and Loss Account, Balance Sheet and Cash flows for years zero to seven. The appendix also included the projected equity on the Balance Sheet up to year seven. The directors gave evidence that their business involved a complicated manufacturing process that was capital intensive. When raising money from family members, the directors advised that the Company would initially be loss-making, that the investment was a long-term investment and that the investors should not expect any immediate return.
Revenue’s Arguments
Revenue argued that State aid can only be allowed under strict conditions and that the Company’s business plan did not meet the requirements set out in Article 21. Moreover, Revenue argued that the projections in the appendix to the Company’s business plan only envisaged four rounds of risk finance investment, which the Company had raised by year seven.
Revenue also argued that it was not the GBER’s intention to provide State aid support to a company throughout the entirety of its existence. The concept of EII is for start-up SME’s newly entering the market or SMEs entering new markets. Revenue submitted that interpreting the “business plan” requirement contrary to the manner in which it did would result in almost every applicant company qualifying for the relief. It would not matter whether the applicant company’s business plan was even viable. Such an approach, Revenue maintained, was incompatible with the overall scheme of GBER.
Determination of the TAC
The TAC observed that Revenue must, in determining an applicant’s entitlement to EII relief, confine itself to the provisions of paragraphs 5 and 6 of Article 21, and should not apply criteria outside those paragraphs which it believes may come within the “broader ambition of GBER”.
The TAC found in favour of the Company. It found as a material fact that the Company did prepare an original business plan in or around 1992, and that the possibility of follow-on risk finance was foreseen in the original business plan.
Comment
Unlike court judgments, the TAC’s determinations are not generally considered of precedential value. The TAC decides cases based on the particular facts and circumstances before it and, the effects of the decision are limited to the parties to the appeal. However, it is understood that Revenue is not appealing the determination. Therefore, older SMEs that have been in existence for more than seven years and have previously raised finance under other risk finance schemes such as the BES, SCS, SURE or EII, may now be able to raise additional funding under the Employment and Investment Incentive (EII) scheme.
