The Brussels inquiry follows a complaint from Ictu, writes Barry O'Halloran

A scheme designed to help small business raise cash seems like a strange subject for a row between the Government and its trade unionist social partners.

But last month, the Irish Congress of Trade Unions (Ictu) took umbrage at Government plans to extend both the Business Expansion Scheme (BES) and the Seed Capital Scheme.

Less than a fortnight after Minister for Finance Brian Cowen announced in Budget 2007 that the Government planned to extend them, the Ictu complained to the European Commission that they were illegal State aids, meaning that they are contrary to Brussels's competition regulations.

The move resulted this week in the commission's competition directorate pledging to investigate the schemes. If it decides they are illegal, it can prevent them from going ahead.

Just to muddy the waters a bit, the Government is applying to the same body for formal approval for both schemes, something the State must have before they become a reality.

The trade unionists believe that these schemes are essentially tax shelters, which allow wealthy people to avoid paying their full liabilities by investing some of their spare cash in them.

That is because they operate by allowing individual investors to claim tax relief against the amounts they put in at the top rate of 41 per cent. The trade unionists believe that this will cost more than the State's projection of €178 million over five years.

Consequently, Ictu says, they don't really help the wider economy, and are not certain to create employment or boost enterprise.

In its letter to the commission, it says the Government is simply acquiescing to a call from its Small Business Forum, which it describes as a self-interested group of "small businesspeople".

The Government, on the other hand, believes that such schemes are a good thing because they encourage investment in small businesses by people who have difficulty getting backing from the banks or other sources of capital.

Cowen announced he was increasing the maximum that could be raised by companies from the BES to €2 million from €1 million, while he was increasing the ceiling on the sum that individual investors could put into such funds to €150,000, up from €31,750.

In the case of the Seed Capital Scheme, he set the investor limit at €100,000.

Outside of business lobby groups, those announcements passed without much comment. So when Ictu headed to Brussels, it took the Government completely by surprise.

Minister for Enterprise Micheál Martin, whose bailiwick includes small business, expressed "utter disbelief" at the news that the trade unionists had complained to the EU about the proposal.

This week, in order to bolster the case for the schemes, the Government published details of a survey of 1,400 companies that participated in the most recent version of the BES.

Its findings show that of those companies, 40 per cent, or 560 of them, used BES cash to create new jobs.

Close to 60 per cent were in the key area of manufacturing, while one in three used the money for research and development. Just over 300 of them raised the maximum €1 million allowed under the previous BES regime.

Most of the beneficiaries were small companies, which were by and large happy with the outcome. So were the people who put cash into the scheme.

Close to 60 per cent of those who invested declared themselves to be either very satisfied or satisfied, which presumably indicates that they got a return - or at least a run for their money.

The Irish Taxation Institute, whose members advise clients on investing in such schemes, says it provides compelling evidence that these policies benefit the economy.

Its president, Mark Redmond, argues that while investors run the risk of losing their cash themselves, if it pays off, both they and the State, whose end of the deal is "increased corporation, income and value-added tax receipts", get something back.

This cuts no ice with Ictu. Its economic adviser, Paul Sweeney, who has been leading the charge on the issue, wants to see and consider the full review, not just a summary of its findings, before commenting at length.

This should include such things as the actual amount it cost the taxpayer and a cost-benefit analysis.

He argues that the Government should have done the review before deciding to extend the schemes.

It's a fair point, but then doesn't it follow that Ictu itself should also have waited for all the relevant facts before making its complaint?

The answer to this is that the organisation says it has already done a lot of research in this area, and that a similar review, done in 2001, bears out its argument.

Its complaint to the commission does not cite this research or the 2001 report. It does propose a number of alternatives to the schemes.

These involve handing taxpayers' money directly to small firms in the form of grant aid, or to the banks, by subventing small business loans or interest repayments.

"Perhaps what is required is that the State would pay half the interest in approved small firms for say five years, with a ceiling, or alternatively, to guarantee one-quarter of the loan also with a ceiling," Ictu says.

"This involves the banks' expertise in assessing the risk in such firms and gives them a degree of certainty on their loans."

Overall, it argues that more competition in financial services would make it easier for small enterprises to get capital, a point with which the Government and business groups would agree.

They do not agree with the trade unionists' complaint to the EU. But Ictu says it is concerned with the public interest and that of its 600,000 members in the Republic.

The public and its members should be grateful then, because Ictu is running a risk for them.

No matter what the outcome, it will have annoyed its social partners (Government, business), but if it loses in Brussels, it's going to look pretty silly as well.