Cowen should also examine BES schemes

Business Opinion: One tax scheme was conspicuous by its absence from the list of reliefs that is to be investigated by consultants appointed by the Minister for Finance, Mr Cowen, writes John McManus

After property-based reliefs, Business Expansion Schemes (BES) are arguably the tax mitigation vehicle of choice for the "high earners", who are identified as the main target of the review of reliefs announced by the Minister for Finance on Budget Day.

It followed a sustained campaign by the Labour Party and the trade unions in the run-up to the Budget which highlighted the extent to which the very wealthy can avail of schemes to cut their tax bills (to zero in some cases).

Yet, for some reason BES seems to have slipped through the net. The reason is probably that, unlike many of the property-based schemes, there is a consensus that BES and the related Seed Capital Scheme (SCS) are a good thing.

Every one from IBEC to Enterprise Ireland expressed concern when it looked as though the schemes might have to be terminated in 2004 because they fell foul of the EU's restrictions on state aid to business.

The principle behind BES is strong, and dates from a time when the Exchequer was far less healthy. It is to incentivise private investors to put money into small and start-up companies operating in sectors that would otherwise find it hard to raise capital.

The rules have evolved over the years, but at present as long as you hold your investment for five years you can claim tax relief on your investment at your marginal rate up to a maximum of €31,750 a year.

To be eligible for investment, companies have to be in one or more of the following sectors; manufacturing, services, tourism, and research and development.

BES has been around since 1984, and there have been some notable successes and plenty of turkeys.

Probably the best known BES-backed company is John Teeling's Cooley Distillery, which raised large amounts of money through the scheme to finance its venture into the Irish whiskey market. It could be argued that it is a good example of how the scheme should work.

Cooley is now a solidly-established niche player in the spirits market. The BES investors may never have enjoyed a spectacular pay day, but they got tax relief and, according to the company, they have all been repaid, mostly in shares in the company.

Another well known company that availed of BES funding is Lir Chocolates

Some BES investors have done spectacularly well. Around 180 individuals shared €2.16 million when Dublin software firm Eontec was sold to Warburg Pincus for €307 million in 2002. Their initial investment of €219,665 netted them a 1,000 per cent profit.

Information on the turkeys is much harder to come by. The odd snippet comes to light via bankruptcy proceedings, but the vast majority just quietly die a death.

The proportion of success stories to turkeys is not known, and suspicion must be that many of the smaller schemes were never really intended to fly and just represented the confluence of the need of a small business for cash and high earners' desires to try and ease the pain of their tax bills.

The reality is we simply do not know the extent to which BES is being abused despite the fact that in the last five years alone the amount of money foregone by the Exchequer in respect of BES was €91 million, or an average of just over €18 million a year.

Assuming that this relief was granted to people at their marginal rates, it implies an annual investment in companies via BES of some €40 million.

The number of investors involved is hard to quantify, but assuming that everybody claimed the maximum allowed of €31,750, a figure of something in the region of 1,200 to 1,300 is suggested.

This figure of €40 million arrived at above is not far off the amount of money invested last year by Enterprise Ireland in Irish companies in the form of equity and seed capital.

It does seem strange then that the Department does not feel that BES is worthy of the sort of external scrutiny that is being extended to the property-based schemes, some of which involve less money and fewer "high earners".

The Department counters that BES will be subjected to a review carried out by itself and the Revenue Commissioners on the basis of "data that is due to come to hand in late 2005".

They also point out that an extensive review of BES and also the similar Seed Capital Schemes was undertaken prior to Budget 2004. But this is something of a red herring when you consider that the review that the Department refers to was in relation to whether BES and SCS broke the EU rules on state aid, and not whether they represented good value for the taxpayer, which is what really matters. Isn't it?