Tax and Entrepreneurship
Calls for changes to existing tax reliefs and the introduction of new reliefs for entrepreneurs are not new. There is no doubt that the continuing uncertainty in relation to Brexit will have a significant impact on Irish indigenous businesses and entrepreneurs. Although recent public consultations covering areas such as Entrepreneur Relief, Employment and Investment Incentive Relief (“EIIS”) and Transfer Pricing (in the context of SMEs) signal that the Government is considering the impact of reliefs for entrepreneurs, further action is necessary.
CGT entrepreneur relief
Ireland’s CGT Entrepreneur Relief is frequently compared to the more beneficial UK equivalent. Under the UK regime, a 10% CGT rate applies on gains up to £10 million whereas under the Irish regime the lower rate only applies on gains of up to €1 million in a lifetime. Reducing this differential could have a positive impact on helping attract entrepreneurs in a post-Brexit world.
The extension of the entrepreneur relief to dividends, whereby a preferential tax rate (10%) would apply to dividends, would also provide an incentive for entrepreneurs to retain ownership and continue working to expand and grow the business rather than divesting their shares in order to realise their investment.
Where entrepreneurs choose to divest all or some their business, it is common that some of the disposal proceeds will be dependent on future events (e.g. earnings targets). However, CGT typically applies upfront meaning the entrepreneur pays the tax before they receive the proceeds. This can inhibit the entrepreneur’s ability to reinvest. Matching the taxing point with the actual time of receipt of earn-out consideration would help address this situation.
Tax efficient financing arrangement
Another avenue for the government to support entrepreneurial activity would be the introduction of a tax efficient financing arrangement for SMEs. This could include the introduction of a special loan finance arrangement whereby individuals could lend money to SMEs and, provided certain safeguards are in place, the individual would be taxed on the interest received at the standard rate of income tax (i.e. 20%) as opposed to the marginal rate of income tax (i.e. up to 55%). At a time when interest rates being offered by banks remain at historic lows, the introduction of such an incentive could provide SMEs with much needed funding and an incentive for individuals to provide them with funding. Such a regime would also compliment the EIIS scheme, which provides tax relief for individuals making equity investments in companies.
Significant administrative changes to the EIIS scheme were introduced last year, which were designed to simplify and increase the efficiency of the scheme. The changes were broadly positive but further changes could be made to enhance the attractiveness and competitiveness of this scheme. One simple change, such as granting full tax relief in the year in which the investment is made, would bring the Irish regime more in line with the UK equivalent.
We expect this year’s Finance Bill to include changes to Ireland’s transfer pricing rules. Compliance with full transfer pricing documentation requirements can be costly and time consuming for many SME groups, particularly those with domestic only transactions. Recent European case law has found that the exclusion of domestic only transactions from the scope of transfer pricing rules is not, in principle, contrary to the freedom of establishment.
The extension of transfer pricing to domestic transactions will also create a range of issues for many indigenous groups given the difference in tax rates that applies to trading and non-trading transactions. Accordingly, the exclusion of domestic only transactions from any future extension of Ireland’s transfer pricing rules would be welcomed.
Updates to existing and the introduction of new tax measures are needed to support entrepreneurs during this time of economic growth and uncertainty. In particular, further enhancements should be made to EIIS and CGT Entrepreneur Relief. As the deadline for the UK to leave the EU draws closer, it is more important than ever that our tax system encourages entrepreneurship and incentivises entrepreneurs to continue to invest and expand Irish businesses. Any legislative amendments to remove the SME exemption from the scope of our transfer pricing rules would be unwelcome. Many EU countries have adopted similar SME exemptions.
CGT Entrepreneur Relief is currently subject to an external review and it is unlikely that changes will be made to the scheme pending the outcome of that review. As there were significant changes made to the EIIS scheme last year, any further changes this year would likely be minimal. A positive and simple change would be the introduction of full tax relief in the year in which the investment is made. A practical solution to address the taxation of earn-out consideration for entrepreneurs would also be a welcome and easily implemented measure. We expect transfer pricing rules will be changed. However, excluding domestic only transactions from the scope of the new rules would reduce the time and cost burden on for those groups.