Tax and Entrepreneurship
We had hoped to see some measures to encourage domestic entrepreneurship, which would in turn help reduce the State’s over-dependence on multi-national companies to generate employment and revenues. However, once again, taxation measures of any real impact to support entrepreneurs and business owners are conspicuous by their absence.
The limited measures that have been introduced include the following:
- The earned income tax credit for the self-employed has been increased by €200 to €1,350
- The three year relief for start-up companies has been extended out to the end of 2021.
As a recognition of the low uptake of the Key Employee Engagement Programme (“KEEP”), a number of amendments have been announced to help indigenous SME companies attract and retain talent. The incentive, which was introduced earlier this year, provides that where employees are given share options as part of their remuneration package, any gains arising to them on the exercise of these options will be liable to CGT on a disposal of shares rather than being subject to income tax. Despite the positive intentions of this programme when it was introduced, uptake has been slow and the programme is being extended to make it more attractive to employers:
- The maximum ceiling on the annual market value of shares that may be awarded is to equal 100% of the employees salary (up from 50%)
- the three-year limit has been extended to a lifetime limit;
- the amount of share options that can be granted under the scheme has been increased from €250,000 to €300,000.
As part of his speech, the Minister referenced possible amendments to the EIIS scheme to improve its efficiency and effectiveness, however, no details were provided. Possible changes which might be made and which would be welcomed would be to align the Irish benefits with those of the equivalent EIS scheme in the UK. Under the UK regime, additional benefits include allowing investors to dispose of their shares in the relevant company after 3 years free of CGT, or to defer gains on disposal of other assets by allowing such taxable gains to be invested in full in an EIS company. Such measures could increase the amount of capital available for reinvestment in domestic enterprises and would be a welcome and significant boost to domestic businesses seeking investment.
- A Future Growth Loan Scheme of €300million for SMEs and the agriculture sector was announced and this is in addition to the Brexit Loan scheme announced last year (also €300million).
- A disruptive technologies fund of €500million will be made available for co-funded projects involving enterprise and research partners over the period to 2027. The scope/impact of this fund is currently unclear.
A number of other measures aimed at the business sector have been announced. These include the following:
- Film relief is to be amended to encourage more productions to be made in areas designated under the State aid and regional guidelines.
- Accelerated capital allowances will now apply where an employer provides fitness or childcare facilities to employees and also where businesses invest in gas propelled vehicles and refueling equipment.
While any measures to support entrepreneurs and business owners are welcome, the lack of any really impactful measures to support entrepreneurs and to encourage entrepreneurship is disappointing.
In what is now a perennial issue, the lack of any improvements to CGT entrepreneur relief to align it with the equivalent relief in the UK is disappointing. In its current form, this relief has very limited application given it is limited to €1 million of a gain. As a nation we should be encouraging and incentivising entrepreneurial endeavours and providing those who develop successful businesses to exit at an appropriate time for them and for the business, and we need to be doing it in a manner that ensures there is sufficient reward for the inherent risk associated with building and developing a business.
With a longer term economic focus in mind, targeted measures to ensure we can keep Irish developed business in Ireland as sizeable employers and wealth creators are needed. Something that is very much lacking in the Irish taxation system at the moment is an incentive to encourage business owners to retain and scale up their businesses to support a culture of large Irish owned business that continue to be owned and based in Ireland. At the moment the tax regime appears geared towards entrepreneurs and business owners exiting the business as opposed to retaining ownership and expanding the businesses into large scale domestic companies.
To achieve this goal, entrepreneurs need to be provided with a mechanism to access value that may be locked away in their business in an efficient manner without having to resort to selling the business as the only way to access value at CGT rates. To extract value in other ways would likely attract significant income tax costs and thus is not an attractive or commercially viable option. While many entrepreneurs exit at a point where they feel they have taken the business as far as they can, many others exit to access value, possibly selling to a buyer that may move the business away from Ireland. As such, fostering a culture to allow business owners access some value and yet retain ownership of their businesses should be a matter the Government focuses on in the future to help ensure a strong domestic sector and buffer the economy in the longer term from outside shocks. One mechanism to enable this would be the introduction of a lower rate of tax on certain dividends, subject to a number of conditions being satisfied and capping it at a lifetime rate in line with CGT entrepreneur relief.