Enterprise Minister says decision to expand the schemes came from a report from the small business forum, writes Ciarán Brennan

When a minister expresses his "utter disbelief" over the actions of one of the social partners, it can be guaranteed that something serious has happened.

Enterprise, Trade and Employment Minister Micheál Martin was directing his comments at the Irish Congress of Trade Unions' decision to lodge a complaint with the EU about the Government's decision to expand the Business Expansion Scheme (BES) in the Budget.

But comments from business groups were even sharper. Small firms group Isme accused Ictu of sabotaging the national economy.

Despite the sweeping criticism, Ictu's economic adviser Paul Sweeney remained unrepentant over its stance.

"All of the criticism is coming from the beneficiaries, but nothing from independent observers," he said.

Ictu has argued that generous terms in the scheme could allow wealthy individuals to shelter their income from taxation.

Under provisions announced in Budget 2007, the amount an individual can invest under the schemes was increased from €31,000 to €150,000, while the amount a company can receive was raised from €1 million to €2 million.

The decision to extend and expand the schemes runs entirely contrary to stated Government policy, which is to reduce rates of taxation and eliminate all tax breaks and loopholes, said Sweeney. Wealthy earners are hiding behind the small business lobby to preserve tax breaks through the scheme, he argued.

That has not only been rejected by Martin's office, but by groups involved in administering the schemes.

"The decision to expand the schemes came from a report from the small business forum," said a spokesman for Martin.

The forum was set up by Martin in July 2005 to assess the climate for small businesses and to advise on the adequacy and appropriateness of public policy responses.

A recent Forfás study found that nearly 70 per cent of small businesses with less than 10 people have difficulty raising equity and finance and confirmed that the BES is a key supplier of finance to emerging Irish companies.

Stephen McGivern of BDO Simpson Xavier, which recently launched the 2006 Davy BES scheme with Davy Stockbrokers, said that pressure from wealthy individuals and their financial advisers was not the reason for changes to the scheme.

"BES was considered by many tax practitioners as dead and gone. This was not something pushed by tax practitioners," he said.

A 60 per cent fall-off in the numbers of people investing in Irish companies through the BES last year would seem to confirm this.

"This was not pushed by the private sector, but by Government agencies who saw it as necessary to kick-start small business," said McGivern.

Ictu has also argued that some of the BES projects have little commercial impact either in terms of employment or in relation to the wider economy.

"What is shocking is the lack of evidence to make such a radical extension to a highly dubious scheme," said Sweeney.

"The scheme takes a blunderbus approach. It mounts up in costs, goes to unintended targets and the effects are negated in the end."

The cost of these schemes to the taxpayer is likely to be far higher than the stated €178 million, because most tax expenditures are underestimated. The tax forgone by the Exchequer will be made up by working people, Sweeney said. "It is a tax avoidance measure," he added.

That's a claim strenuously rejected by the Institute of Chartered Accountants in Ireland.

Immediately after the Budget announcement, its director of taxation, Brian Keegan, said the extension of BES should not contribute further to the debate about tax paid by high earning individuals as it seems that BES will remain limited under the overall cap on reliefs availed of by individuals in any one tax year.

"First of all, BES is egalitarian. It is fair and equitable because it is available to all. There's no floor to the level of investment," said Keegan.

Many company employees take part in schemes, according to the Irish Taxation Institute's president, Dermot O'Brien.

"The BES is a risk. It's not just a rich man's playground," he said.

But Sweeney's assertion of a lack of evidence of the benefits for business and employment flies in the face of the facts, according to those who support the extension of the BES.

David McKernan, who seven years ago, left Bewleys to set up his own coffee roasting company Java Republic, said he owes his success to the BES.

"Our business would never have got off the ground only for a number of people who put in money to back the company as a manufacturing business through the BES.

"We're now employing 25 people in Dublin and a further 10 outside the city."

He is also critical of Sweeney's argument that what is required is initiatives from the banks and other financial institutions to more readily give loans to small businesses, rather than tax incentives.

"The banks won't back small businesses with risk unless you put your house up and I've done all that before," said McKernan.

"They are so comfortable they don't have to take the risk. The guy is completely naive and would need to get out into the commercial world."