Firms will not be able to apply for funding under business expansion or seed capital schemes until the autumn at least, the Department of Finance said yesterday.

The delay is due to an in-depth review of the two fiscal incentive schemes by the European Commission. It is believed this examination is part of its wider inquiry into EU state aids.

However, the Department of Finance has received sanction from the Commission to proceed with the Government's proposed research and development (R&D) tax credit. This new measure will enable companies engaged in incremental R&D to apply for a 20 per cent tax credit.

The Government announced the tax credit in the Budget last year in an attempt to encourage companies based in the Republic to undertake more R&D.

Despite granting approval for this initiative, the Commission has failed so far to sanction the two other tax incentive schemes.

Business expansion schemes and seed capital schemes are two key Government policies designed to increase entrepreneurial activity in the Republic.

In the last budget, the Government announced the extension of the schemes and a €250,000 rise in maximum funding to €1 million until the end of 2006. But the two schemes have been on hold since February because of the ongoing Commission review of state aids.

Mr Brendan Butler, director of ICT Ireland, said the failure of the European Commission to sanction the schemes was undermining small firms in Ireland.

"It is problematic and unacceptable that the European Commission is constantly saying it wants to promote early stage firms on the one hand, and yet, on the other, is stopping funds," he said.

He said the policy was putting at risk some of the most vulnerable companies in the Republic.

In an unprecedented move, the State agency Enterprise Ireland also criticised the delay in the sanction of the two schemes.

"These schemes are a crucial source of finance to promoters at the formation stage of developing and growing newly established businesses," said Enterprise Ireland. "If the current position persists in any protracted way, it will create a serious barrier for entrepreneurs at a point when the development of their businesses and securing international sales requires early stage risk finance not available from other sources."