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
Although this relief is welcome, it is of limited value when compared to similar benefits offered under the UK regime. The relief currently applies a reduced CGT rate of 10% on qualifying gains of up to €1m in a vendor’s lifetime. The UK equivalent applies up to a £10m threshold. This has led to entrepreneurs questioning whether Ireland is the best location from which to operate their business, particularly given the proximity of the UK. We would suggest that this relief is improved in order to enhance Ireland’s attractiveness to entrepreneurs and help ensure indigenous companies flourish beyond start-up phase.
A further issue is the premature exit of entrepreneurs upon a business reaching a value milestone, thus stifling the ambition to grow and scale an Irish-owned company. To encourage longer-term commitment to and scaling of Irish indigenous business, we suggest the introduction of a tapered CGT rate that would reflect the length of time the individual has held his/her shares. This relief could be linked to other reliefs (discussed below) which would also allow an entrepreneur to access cash as necessary.
Preferential Dividend Rate
The recent Deloitte survey highlights how the high marginal tax rate imposed on individuals is a major barrier to Irish entrepreneurship, punishing such individuals for accessing cash for living expenses and for enjoying the fruits of their labour and risk-taking. Why reward an entrepreneur with a low CGT rate for selling their company yet penalise them with high income tax rates if they choose to retain and grow the company? Surely there should be an incentive in either scenario? We suggest that a 20% tax rate on dividends should be provided to entrepreneurs, subject to an annual and/ or lifetime dividend cap and subject to the company having been trading for a period of 5 years. This incentive would reward successful entrepreneurs who have emerged from the start-up period, whilst encouraging retention of cash within the business to allow for growth.
The relief would be capped and linked to the increased CGT entrepreneur relief lifetime cap, discussed above, such that two separate reliefs cannot be claimed on the same investment.
CGT retirement relief
We suggest that the application of the 66 year age threshold for CGT retirement relief is outdated and counterproductive. This is particularly important in light of a culture of older entrepreneurs, government’s policy to increase the pension age and the overall increasing age of Ireland’s population. Whereas CGT retirement relief on transfer of a business to a child is uncapped if the vendor is below the age of 66, a €3m threshold applies where the transferor is aged 66 years or over.
While the original policy objective was to encourage early transfers (i.e. prior to an individual reaching 66), it has in fact had the opposite effect in many instance with many age 66+ business-owners opting to retain their shares, allowing them to pass to the next generation upon death in order to avoid this CGT issue. We would suggest that the policy objective could be achieved by distinguishing family transfers (irrespective of the transferor’s age). This would encourage the individual to take the right decision for the business, rather than allowing the timing of a business transfer to potentially be largely tax-driven.
A further issue with CGT retirement relief arises in its interaction with CGT entrepreneur relief. In many family businesses, parents transfer some shares to a child in order to introduce the child to the family business, incentivising him/her upfront and will reserve the transfer of the remaining shares to an appropriate future time. If in the meantime a decision is made to exit the business, the parent may very well not be in a position to avail of entrepreneur relief as all prior gains are aggregated for this purpose – including on transfer to a child (albeit that the transfer itself may have been exempt under retirement relief). We would suggest that the aggregation test for entrepreneur relief should be amended to exclude those gains to which retirement relief has applied.
In order to encourage entrepreneurs to commit to their business for the longer term, the CGT position should be amended by granting such individuals higher lifetime limits and lower rates of CGT, commensurate with how long they have held their shares in the business. In addition, cash extraction and exit measures reflecting a longer holding period should be considered to further incentivize an entrepreneur to stay in the business and grow it for either an IPO or the next generation.
There may be minor enhancements to the CGT entrepreneur relief, but they will not be sufficiently significant to bring us in line with the UK equivalent and how the issue is approached in other locations. At a time when entrepreneurs may be considering an alternative home in a post-Brexit world, the absence of a significant improvement (or a clear strategy in terms of how the CGT entrepreneur relief might evolve) would represent a missed opportunity.