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The hidden truth behind Irish tech’s record billion euro raised in six months

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Michael McGrath's Budget is eagerly awaited. Source image: Bloomberg Michael McGrath's Budget is eagerly awaited. Source image: Bloomberg

View original article at Irish Independent

Will Budget 2024 change Irish tax policy to help tech startups?

Like children writing their wish list for Santa Claus, startups lined up last Wednesday to make their case to Finance Minister Michael McGrath ahead of next month’s Budget 2024.

Scale Ireland, the representative group for tech startups, held its annual autumn gathering. Michael McGrath was in tow for a keynote speech and he also sat in on two panel discussions, to hear from startup founders and investors about the state of the industry and how policy changes could help.

With the Budget just a month away, interest groups are clamouring for the ear of the minister.

For those in the startup scene in Ireland, many of the questions will be familiar ones with a sense of déjà vu of budgets past.

Tax relief for small investors, share options schemes, capital gains tax and research and development tax credits are all on the minds of tech entrepreneurs once again.

For McGrath, it is his first budget since taking the reins from Paschal Donohoe.

‘The way to unlock private capital is to make it more attractive from a tax point of view’

“It’s my first opportunity to really get under the bonnet of the taxation system and fully understand the different schemes that are there — what’s working well, what’s not working so well — and how we can make things better within the constraints.

“And there are always constraints. I can’t do everything,” he said.

“But I do think there will be opportunities within the Budget to make tangible improvements to the overall environment.”

Whatever those changes are, there is one prevailing theme among Ireland’s startup set: funding.

Brian Caulfield, the chair of Scale Ireland, said that founders have frequently flagged funding as a major issue affecting growth.

A recent report from the Irish Venture Capital Association sends mixed signals about Ireland’s startup funding landscape.

The banner figure is €936m. That is the record figure in financing that Irish tech companies raised in the first of the half of the year.

But wiping away the sheen of the headline number shows a problem emerging.

That €936m is bulked up by four particularly large funding deals, totalling just over €320m for four companies — Everseen, NomuPay, Jolt Energy and Weev.

When those deals are excluded, it shows that investment actually fell by 52pc during the second quarter compared to the previous year.

“The reality is there are deep concerns, as the number of deals below €1m declined by 55pc compared with the equivalent period last year,” Caulfield said.

A broader economic downturn, coupled with higher interest rates, has impacted global tech — and Ireland has not been unaffected. This is evident in this slowdown in venture capital funding and the shedding of jobs at major tech companies.

​The Employment Investment Incentive scheme (EIIS), a tax relief for investors, is frequently cited as a means to unlock capital from smaller backers, such as angel investors, that could flow into young tech startups in need of early-stage financing.

Currently, the scheme allows a tax relief of up to 40pc for individual investors putting money into SMEs.

In its pre-budget submission, Scale Ireland argues for the introduction of capital gains tax (GCT) loss relief on failed or loss-making EIIS investments.

“This would remove the difference in CGT treatment between EIIS and other investments. This would also make EIIS investments more attractive to potential investors, thereby increasing the supply of capital to Irish-based companies,” it said.

Under the existing terms, the maximum allowable investment in a company through EIIS is €500,000. Scale Ireland is calling for this to be raised to €1m, pointing to similar terms in place in the UK’s equivalent scheme.

‘We never applied for an Enterprise Ireland grant, because of the complexity of applying’

Kealan Lennon, chief executive of fintech startup CleverCards, told the Sunday Independent that simplifying tax measures such as EIIS can have a profound effect on an industry and help get capital flowing, referencing tax measures for the film industry in Ireland.

“There is actually a lot of private capital in Ireland,” Lennon said. “People have money, but they’re not going to go and deploy it into a higher-risk investment. The way to unlock that is to make it more attractive from a tax point of view.”

Companies need as many avenues to raise money as possible, he said, especially when it comes to scaling.

“At CleverCards at the moment, we’ve got about 40 people and we’re hiring another 33 before the end of the year. We’re expanding. We’re an example of a 40-person company that’s going to 70 by the end of the year, and that has to be funded.”

But any changes to EIIS will not be straightforward, with EU state aid rules looming large.

The General Block Exemption Regulation, or GBER, sets parameters around aid that governments can provide to industry and specifies what measures may need approval from the European Commission.

Minister McGrath was quick to point out that GBER will influence how EIIS is handled in the Budget.

“What it means is that some of the existing reliefs within that framework are going to have to be restricted. But it does open up opportunities to expand certain reliefs in a manner consistent with GBER,” the minister said.

“On GBER, there are strands where we have no discretion, and in certain instances that will result in a restriction on some reliefs. But there are other areas where the scope is broad and can go further.”

​Implementing more favourable terms is just one part of the puzzle.

Dee Coakley, chief executive of Boundless, spoke of the complexity and red tape often associated with applying for grants and reliefs that can often be too burdensome to a startup that is juggling its day-to-day operations.

“We have never applied for any grants from Enterprise Ireland, because of the complexity of applying,” she said.

Coakley also spoke of the need to simplify the regime in Ireland for issuing share options.

Boundless manages employment, HR and tax issues for companies that employ remote workers in different jurisdictions.

‘This is someone who’s taking a bet on Ireland, not on a multinational’

“Companies will often have Irish employees, as well as employees in many other countries. We look at how these things are done in all of the countries where we support employment,” she said.

Barry Lunn, chief executive of Limerick-based automotive tech startup Provizio, told the Sunday Independent that share options schemes shouldn’t “punish” the companies and employees that use them.

In Ireland, disposal of shares is subject to capital gains tax.

“When a company wants to give shares to an employee, it’s because they want to keep them and keep them long-term. For me, why would you even tax that?

"This is someone who’s taking a bet on Ireland long-term, not on a multinational. They’ve chosen a startup and not Google. They take that risk, so there should be a quid pro quo. They shouldn’t have to pay any taxes on share options,” he said.

“Long-term, if they get a payout of that, what are they going to do? They’re going to reinvest it in Ireland anyway.”

Lunn said that there needs to be a “blank sheet” and total reform of all tax relief policies, rather than tweaks — especially on capital gains tax, a recurring bugbear among startup lobbyists.

Scale Ireland supports the introduction of a lower 20pc rate of capital gains tax on gains arising on the disposals of investments in startup and scaling companies. The tax is currently 33pc.

Sitting in the auditorium last Wednesday, Michael McGrath took in all the views, adding to his presumably ceiling-high stack of pre-budget submissions ahead of the Budget 2024 speech on October 10.

Just how deep McGrath will go on startup-related tax schemes remains to be seen — but he did not shy away from the fact that some people may be disappointed.“We certainly won’t be able to do all of the proposals, but I think we can make progress on some.”

View original article at Irish Independent