The Government's decision to reduce the amount a company can raise under Business Expansion Schemes, from £1 million to £250,000 has been criticised by fund managers. The move is effective immediately but the Finance Minister, Mr McCreevy, said transitional arrangements would be put in place to cater for BES projects in the pipeline "which are well-advanced prior to today".
However, Mr John McGilligan, managing director of Business and Trading House, which this year raised £2.5 million in BES funds, said it contained the "elements of the very worst form of retrospective legislation".
He said his company, which has run nine funds would not do one next year, because of the changes in the legislation. He also said he doubted whether big firms who run £4 million-plus BES funds would be interested either. "Many will not want to have to put £250,000 in 20 different projects when they could previously put £4-£5 million in funds into larger projects."
Mr McGilligan said money had been raised by fund managers last February and March, to be invested during this tax year, on the understanding that up to £1 million could be invested in projects. Mr McGilligan, who will complete investment on his final project next week, said he knew of many fund managers who had still not completed investments. "I am very surprised at the timing. I know the Minister said arrangements would be made for projects which are well-advanced, but what does well-advanced mean?"
Between £40-£50 million was raised under BES this year.
Mr Jim Rourke, managing director of ICC's BES division, which raised £7 million this year, said the company would be "watching the transitional arrangements with interest".
He said like other companies ICC had a number of deals which had not yet been "fully consummated".
Mr McCreevy said the reduction would achieve a better targeting of the relief on smaller companies who find it difficult to raise equity finance from other sources.
Mr Rourke expressed surprise that the Minister had reduced the amount that can be invested. He said the scheme, which gives generous tax breaks to investors, had been refocused in last year's Finance Act. This meant that any project raising over £250,000 had to be vetted for approval by a development agency such as Forbairt, to ensure that it had a genuine employment content. Mr Rourke said this was working well and fund managers felt it had had the desired effect. He predicted that the measure would hit medium-size firms most.
"It will certainly reduce the number of companies who will be interested in availing of BES," he said.
Mr Rourke said that there was also a capital cost associated with raising BES funds and it was really a fixed cost, even if someone was raising just £250,000. "People will look at the cost of raising £250,000 which will be relatively more expensive than raising £1 million, " he said.
However, Mr Rourke said it was too early to see if it was the end of BES. "We will be looking at the implications of the changes," he said. "There is still an appetite from investors to put money into BES."
Mr McCreevy told the Dail yesterday that the estimated savings from refocusing the scheme is about £20 million in a full year.