Maintaining tax incentives to promote entrepreneurial activity is crucial for the software industry's future development, a lobby group urged yesterday.

In its latest taxation study, the Irish Software Association (ISA) warns the Government against curtailing any of the current tax incentives that support the software industry as part of its ongoing review of tax breaks.

Gerry Jones, a member of the ISA's taxation group, said high-growth businesses still face difficulties in raising new capital.

"There is a structural gap in the market for companies seeking relatively modest sums of risk capital. This gap is most acute for companies seeking equity of between €500,000 and €3 million per round," Mr Jones said.

To further promote the sector, the ISA recommends that the Government make amendments to tax legislation. It recommends increasing the funding available to firms under business expansion schemes from €1 million to €5 million; setting up an internal R&D fund for Government departments - which could highlight innovative software systems that could benefit the running of Government - and loosening the approval criteria, which exist for employee stock option schemes.

The ISA says that only a small number of companies in the sector qualify to participate in Revenue-approved stock option schemes. This is principally because the rules governing the tax treatment of employee stock are restrictive, the ISA claims.

The personal limit for individuals making investments through these schemes - one of the few tax reliefs that is not being investigated by the Government - should be increased to €300,000.

This would encourage greater investment in young firms, the ISA's taxation study stated.