Navigating the tax landscape
The Irish entrepreneur’s view
There has been a lot of debate recently on how we can foster an environment in Ireland which is conducive to encouraging and growing our entrepreneurial culture.
The tax system plays a crucial role in supporting entrepreneurs and influences decision making at each stage of the entrepreneurial journey. Examples of such decisions include how to fund a business, where different functions within the business should be based, how best to fund personal living expenses whilst still maintaining sufficient capital to grow the business and ultimately when and how to exit the business or pass it on to the next generation.
Our ‘Navigating the tax landscape’ survey considers how entrepreneurs view the tax system, how the taxation of their return on investment impacts decision making, the suitability of various tax reliefs and incentives, together with the importance of tax efficient remuneration.
Unsurprisingly, one of the primary concerns of start-up enterprises and SMEs is the ability to attract and retain key talent, who are central to growth for early stage companies. The majority of respondents felt that the Irish tax code did not offer sufficient flexibility in this regard, and the lack of tax efficient remuneration as a tool for employee retention was cited as the most significant tax barrier for scaling and growing a business.
Entrepreneurs were particularly open to the idea of giving shares in their company to key employees as this would be a powerful incentive for them to retain their team and to allow them to share in the success of the business. However, there is currently no efficient way of doing so. The UK offers a tax efficient employee share scheme known as the Enterprise Management Incentive (EMI), and the introduction of a similar incentive in Ireland would be very well received. Therefore, the announcement in last year’s budget that Ireland would introduce a share based incentive for SME businesses is very welcome. Details are anticipated to be forthcoming as part of the Budget 2018 and it hoped that the tax policy changes in this area will be extensive enough to really assist business in this important area for talent acquisition and retention.
The taxation of remuneration and the return on investment were also key areas of focus in our discussions. 63% of respondents were of the view that more a favourable tax treatment for remuneration or return on investment in a company was the greatest incentive for entrepreneurs to drive growth.
High Marginal Tax Rates
High marginal income tax rates were cited as having a negative impact on entrepreneurs, and over 75% of respondents cited that high marginal rates have influenced decisions to take dividend / salary remuneration in the past. It is important that tax policy strikes a balance between encouraging entrepreneurs to retain cash within the business to provide for growth and scaling, whilst rewarding successful entrepreneurs who have emerged from the challenging start-up period and who are driving employment growth. With this in mind, the introduction of a 20% rate on dividends paid to entrepreneurs subject to an annual dividend cap and subject to the company having been trading for a specified period, e.g. 5 years, would be seen as an appropriate way of rewarding entrepreneurs. It would also encourage entrepreneurs to retain ownership of their company and to scale it, rather than selling and availing of a lower rate of tax by paying Capital Gains Tax.
Competitive foreign tax regimes
We also asked entrepreneurs for their views on the attractiveness of comparable reliefs offered by the UK, such as the UK Entrepreneurs Relief which applies when an entrepreneur sells their business. A similar relief in Ireland was recently improved however it is not yet operating on a par with the UK’s regime, which provides for a 10% rate of CGT on gains of up to £10m. It is therefore not surprising that over 97% of respondents felt that bringing the Irish relief in line with the UK equivalent would have a positive impact in Ireland. Perhaps of greater concern, however, is that over 89% of respondents stated that the relative attractiveness of the UK entrepreneur relief would make Irish entrepreneurs more likely to consider setting up and basing their operations in the UK. A similar consideration can be relevant for entrepreneurs establishing in the US.
This willingness to relocate is particularly interesting in light of Brexit, which is likely to be a key influencing factor currently for certain businesses in any decision to relocate. Of particular importance in this regard will be the relative importance of access to the EU and UK market places. Nonetheless, entrepreneurs were clear that in a tax context alone, leaving aside other commercial factors, they would consider setting up and basing their operations in the UK as the UK has a more competitive tax environment for entrepreneurs. The relative ease of setting up operations in Northern Ireland may prove influential in this regard, and there is a risk of losing present and future entrepreneurs to the UK and US for example, where our tax regime does not remain sufficiently competitive.
Our domestic tax system is key element in galvanising our entrepreneurial sector and it is imperative that the system incentivises innovation, encourages longevity and provides a safety net for those businesses that fail. There is a need for the Irish tax system to, at a minimum, treat those individuals who take risks in creating employment and growing the domestic economy no less favourably than other taxpayers. Instead, in some cases, the current tax regime is perceived as treating less favourably those it should be supporting. Given the likely limited fiscal space for tax measures over the coming number of years, it is clear that everything cannot be done in one year. However, a roadmap of the planned evolution of our tax system out to 2020 to address the entrepreneurship agenda would be welcome and a step in the right direction.
For more information see our navigating tax landscape survey.