The current state of play for the Irish entrepreneur
There has been much debate recently in relation to fostering an environment in Ireland which is conducive to encouraging and growing our entrepreneurial culture. As a consequence, there has been a large degree of lobbying by interested stakeholders to try and improve the tax system as it applies to entrepreneurs.
The Finance Act 2016 introduced several changes which impact on the owners of Irish businesses (specifically SMEs) both as employers and as self-employed individuals. This article highlights an overview of some of the key changes.
Increase in earned income credit, USC reduction and extension of certain PRSI entitlements
The Finance Act 2016 took positive steps in closing the gap between the taxation of self-employed individuals and their employee counterparts.
The ‘Earned Income Tax Credit’ was introduced by Finance Act 2015 for self-employed individuals and proprietary directors who are ineligible for the PAYE tax credit which is available to other employees. The tax credit increased from €550 to €950 under Finance Act 2016.
Although this represents a positive step, it was widely agreed that the increase fell below expectations. However, the tax credit is expected to increase to €1,650 in 2018 matching the PAYE tax credit which will be more in line with expected levels.
With regard to USC, the Finance Act 2016 introduced a half percent reduction to each of the first three USC rates, bringing them down to half percent, two percent and five percent respectively. There was also an increase in the entry point to the five percent rate.
There has been no change to the eight percent or 11 percent USC rates. As in previous years, the 11 percent rate will apply to non-PAYE income in excess of €100,000 which remains as a significant negative for self-employed individuals compared to employees. In other words, an individual who is self-employed who earns in excess of €100,000 is paying an additional three percent in USC than their PAYE equivalent on the exact same salary.
Entitlements available under the Class S PRSI stamp have long been an area of contention on the basis that it offers very little in terms of benefits. Therefore, it is also worth noting the Finance Act provided that treatment benefit and invalidity pension will be available for self-employed individuals from March 2017 and December 2017 respectively. A small step but a step in the right direction.
While the above changes are positive it was felt that the Finance Act 2016 fell short in its attempt to address the imbalance between employed and self-employed individuals.
An area which gained a lot of spotlight was the reduction of the CGT rate available under Entrepreneur Relief.
For disposals of the whole or part of a qualifying trade or business owned by a qualifying individual for at least three years made on or after 1 January 2017 and to which entrepreneur relief applies, the applicable rate of capital gains tax is reduced from 20 percent to 10 percent.
This represents a CGT saving of up to €230,000 when compared to the standard rate of 33 percent.
Although a welcome relief for entrepreneurs, it was disappointing that there was no increase to the lifetime limit of €1million which is not competitive when compared to the UK equivalent of £10 million. However, it was acknowledged that this limit may be reviewed in future Budgets.
Employment & Investment Incentive Scheme (EIIS)
Although there was no increase to the company limits in the Finance Act 2016, unlike its predecessor, it was a welcome announcement for businesses and investors alike that the EIIS will be removed permanently from the High-Earners Restriction (previously exempt until 31 December 2016) in a move that will surely benefit small and medium sized companies raising investment.
Start your own business
Another incentive aimed at promoting Irish growth within the SME sector was the extension of the Start Your Own Business scheme for a further two years to 31 December 2018.
The scheme provides relief from income tax up to maximum earnings of €40,000 per annum for a period of two years for qualifying individuals. The relief applies to an individual setting up an unincorporated business. A condition of the relief is that the individual must have been unemployed for 12 months or more and in receipt of at least one of certain social welfare payments prior to establishing the business.
Corporation tax rate
"… Ireland's 12.5 percent corporation tax rate will not be changed and nobody is asking for it to be changed."
Although it was not expected for the rate to change, Michael Noonan confirmed, in his Budget speech and a number of times since that Ireland is committed to the 12.5 percent corporation tax rate.
As our low corporate tax rate is a major incentive for both domestic and international investment this was a reassuring confirmation for most businesses.
However, as discussed by Tom Maguire, Tax Partner Deloitte, in his recent Sunday Independent article, the playing pitch may be set to change going forward.
With President Trump proposing to slash the US corporation tax rate and Theresa May stating that after Brexit the UK will be in the position to enjoy “the freedom to set the competitive tax rates and embrace the policies that would attract the world's best companies and biggest investors to Britain"; this focus may impact on Ireland’s competitive edge and this should allow the Government to reconsider how best to reposition our strategy to continue Ireland’s success as an attractive FDI location.
There needs to be consideration given to the number of very successful Irish “tech” entrepreneurs who have located to Silicon Valley – is there an opportunity for the Irish Government to encourage these Irish entrepreneurs to move back home and possibly incentivise their non-Irish equivalents to relocate here also?
In order to remain competitive and to encourage these tech entrepreneurs to “come home” Ireland must preserve its low corporate tax rate but also be positioned to attract the top IT professionals to relocate here whilst retaining homegrown talent. To this end, the introduction of reliefs such as the Special Assignee Relief Programme (SARP) and the Foreign Earnings Deduction (FED), both extended to 2020 under the Finance Act 2016, have acted as an incentive for employees relocating here but currently there are no equivalent reliefs in place to retain the Irish employee who is taxed at the top Irish tax rate.
Whilst an Irish company can avail of a low corporate rate, a key question is whether this incentive is sufficient when the people behind the company are paying tax at up to 55 percent. Is sheltering the first €1 million of a gain on disposal of a business against 33 percent capital gains tax enough? What further steps can the Government take in order to make Ireland an attractive location for entrepreneurs going forward?
The Finance Act 2016 acknowledged the importance of Irish SMEs by taking positive steps to encourage growth in the sector and through moving towards equality for all taxpayers.
Nevertheless, the Government fell short in their attempt to establish Ireland as a centre for innovation and entrepreneurship through the current schemes in place.
There is a need for the Irish tax system to at a minimum equalise the entrepreneur who takes risks in order to create employment. Instead the current tax regime penalises entrepreneurs for showing this initiative.
Whilst Ireland has an extremely favourable corporate tax structure in place, the Government may need to rethink our strategy around “entrepreneurship” for both incentivising indigenous start-ups and attracting entrepreneurs from overseas back or into Ireland.