Tax and Entrepreneurship
While the economic climate for businesses in Ireland has improved in recent years there is still a lot more to be done to help Irish entrepreneurs and their businesses to succeed in a climate of heightened uncertainty. Initial results from a recent Deloitte entrepreneurs’ survey highlight the crucial role of the taxation system in supporting entrepreneurs and how it influences their decision making at each stage of the entrepreneurial journey. Examples of such decisions include how to fund their 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. Our domestic tax system is key in propelling our entrepreneurial sector and it is imperative that the system incentivises innovation, encourages longevity and does not punish failure. In this regard, we note the following areas of taxation as key to enhancing Ireland’s attractiveness to entrepreneurs when compared with our nearest neighbours:
CGT entrepreneur relief
The lack of attractiveness of Ireland’s entrepreneur relief, when compared to the UK equivalent, have led to repeated calls for the Irish regime to be aligned with the UK system. As many will be aware, 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.
Some commentators would argue that the cost to the exchequer is not justified as entrepreneurs do not make business to set up a company based on tax rates. However, one of the key benefits of entrepreneur relief is that entrepreneurs would have more capital to foster and grow their next venture. We need to be encouraging serial entrepreneurs.
The recent Tax Strategy Group (TSG) report also acknowledged that reduced CGT can also boost entrepreneurship and investment from those not directly involved in the management of the companies.
With significant uncertainty remaining as to what form Brexit will take, and with many entrepreneurs evaluating where they will base themselves in a post-Brexit world, any changes to attract them to Ireland have to be welcomed.
There may be a variety of commercial reasons why an Irish trading group would be held by a Holding Company which would ultimately sell the operating companies. In such a scenario, entrepreneur relief is not available to shareholders when they ultimately wind up the Holding Company. The corresponding UK regime allows the relief to shareholders in such scenarios, subject to some restrictions, and this is an area that there is merit to be considered in Ireland.
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.
While the EIIS provides some finance options to SMEs the scheme is overly cumbersome, particularly with respect to follow up investment for which relief is no longer allowed where the original business plan did not explicitly state that this follow on investment was foreseen. The number of applications in 2017 was half that in 2016 and investor appetite for this scheme has certainly waned.
Similar to Entrepreneur Relief, the Irish EIIS regime is lacking when directly compared to the UK regime. Income tax relief is available in both Ireland and the UK but in addition to providing for more generous company and investor limits, the UK regime enables UK investors to sell their shares without any CGT (in Ireland CGT applies at a rate of 33%). We would like to see the Irish EIIS being enhanced to bring it in line with the corresponding UK relief.
In order to further support and encourage entrepreneurs, amendments to Entrepreneur relief and the EIIS are required to bring these reliefs more in line with their UK equivalents. For those investors that are not influenced by tax rates, support should be provided by way of introducing a tax efficient financing arrangement for SMEs.
While there may be changes to entrepreneur relief, any changes are not expected to be sufficient to bring the Irish regime in line with the UK regime. It might be the case that more fundamental changes would make a bolder statement of intent, particularly with a view to attracting entrepreneurs to Ireland post-Brexit.
It is unlikely we will see any major changes to EIIS, or the introduction of a new SME financing regime, but at least signalling the intent to evaluate such changes, or similar ones, would be a hugely welcome step in acknowledging the need to do more to support indigenous businesses.