Ireland in danger of losing a generation of Innovative SMEs

The Irish Government is being called upon to form an SME Task Force to implement urgent changes to ensure the survival of innovative, entrepreneur-led SMEs and start-ups.

smeLiz McCarthy of the newly-formed Alliance

The new Alliance for an Innovation-Driven Recovery comprising Euronext, HBAN (Halo Business Angel Network), Irish Venture Capital Association, Scale Ireland and TechIreland has been formed to recommend Budget neutral actions to fend off the danger of an entire generation of innovative companies being lost to the fall-out of the Covid-19 pandemic.

In its pre-Budget submission, the alliance recommends amendments to the Employment and Investment Incentive Scheme (EIIS) to encourage more equity investment by private investors which would reduce dependence on government financial support for start-ups.

Early stage tech investment has fallen off a cliff
“Covid-19 has seen funding to early stage companies fall off a cliff with investment down by 60pc in the first half of 2020 according to the TechIreland funding report – a statistic that we can see playing out on the ground,” said Scale Ireland CEO Liz McCarthy. “We need to take action in order to save a generation of high growth tech SMEs from being wiped out.

“We are well aware of the major financial constraints of government which is why we pooled our best brains to come up with Budget neutral or positive initiatives. Job creation is once again a government priority. Research by DCU Business School, which found that equity backed tech firms create high paid jobs significantly faster than other types of SMEs, underscores the need for the government to focus on this sector.”

Alliance recommendations
Amongst the initiatives, the alliance recommends the formation of a high-growth SME Task Force to be established by the Department of Finance along with the Department of Business which would focus on indigenous enterprises with exponential and export potential.

Welcoming Enterprise Ireland’s recent €10m in additional funding for the Seed and Venture Capital Scheme, Ms McCarthy said that the most pressing policy issue remains early-stage investment.

Employment and Investment Incentive Scheme (EIIS) recommendations include a special Covid emergency Capital Gains Tax (CGT) exemption on all qualifying investments up to the end of 2021.

The submission argues that this would reduce the risk of insolvency due to current liquidity pressures and support Revenue through reduced welfare payments while maintaining income and other taxes.

It also recommends enhanced tax relief for micro companies which are defined as those employing less than 10 people with revenues under €2m. Because of their small size and higher risk, these companies tend to miss out on EIIS investment.

“Yet the history of many of the world’s most successful global tech companies is that many started with just an idea in a garage or student dorm,” said McCarthy.

Other recommendations include greater certainty around EIIS status; permit other investment vehicles to qualify for tax relief on EIIS and standardise the investment period for all qualifying investments to four years.

Commenting on the proposals, Anna Scally, partner KPMG, said: “Incentivising investment through enhancing EIIS would encourage private capital investment in risky start-ups, minimising the need for direct government support and reducing the net cost to the exchequer.”

She added that the EIIS was not currently structured to incentivise investment in early stage innovation driven companies where the risk was higher and bank loans almost impossible to access.

“Equity funding is thus a critical source of investment for these types of companies.”

SME Task Force
Speaking with ThinkBusiness, McCarthy explained that the sector needs to be on the Government’s agenda.

“We’re looking for the creation of an SME Task Force so that there’s a structured vehicle there for us to engage with and actually constructively contribute and point out what’s happening to SMEs on the ground.”

Among the myriad of issues to be addressed are deficiencies in the existing EIIS scheme which is not as competitive as its UK counterpart and the still languishing and out-of-touch CGT regime. Both of these issues are preventing more robust private investment or “deal flow” into companies, particularly early stage companies.

“There are these gaps and we think a Task Force will make a difference. We can point out what’s happening on the ground and what needs to be worked on. No doubt the Government is dealing with legislative matters at the moment but we’re saying ‘just focus on these issues as a starting point’. These are quick and should be easy to implement. We think they are practical.”

At a time when small businesses up and down the country are being pummeled by the impact of the pandemic and various lockdowns, when young start-ups are running out of cash and runway and when a no-deal Brexit is looking increasingly likely, the call for the creation of a Task Force to help put structure on practical steps policymakers can follow is prescient.

Not only that, issues around EIIS and CGT have remained unresolved for more than a decade. It is not just the future of entrepreneurship that appears to be at stake, but the future of enterprise on this island.

It remains to be seen if these actions will be heard as the Government prepares for Budget 2021, the most challenging Budget in the history of the State; a State still navigating the Covid-19 pandemic.



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