Budget 2022 is just around the corner and a key time for entrepreneurs

Tom Maguire discusses Budget 2022 in his Business Post column

The summer is the time when temperatures increase and when pre-budget discussions outlining various suggestion to amend our tax law are had by various groups and stakeholders. As Myron Scholes (Nobel prize-winning economist) and others once wrote: "Success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities ...". We need to continue to encourage and incentivise a thriving domestic entrepreneurial economy and one that ensures the next “Instagoogletweetface” or “Aghaidh Leabhar” and others start and thrive here.

In essence, an entrepreneurial activity is about founders getting in, staying in and then passing the business on at the appropriate time. Each stage can in itself, form part of a decision in getting an operation off the ground and therefore tax should be there to help. Simple maths with the concept being to ensure that funds are available to invest and grow in the business which can then pay more tax into the future through tax on profits, sales, salaries etc. Tax nerds will be spluttering into their muesli reading this saying the necessary protections need to be put in place and they’re right, with the appropriate balance to be achieved here in accordance with the Scholes doctrine I mentioned earlier.

Ireland has a regime to allow investors income tax relief on investments in shares in certain companies up to certain limits each tax year in the form of the Employment Investment Incentive Scheme (EIIS). Other countries have similar reliefs but allow higher levels of annual investment limits than those applicable here. The lower annual investment limits that apply here impact the possibility of more significant funding being provided by individual investors and may also discourage longer-term investors. Consideration should be given to increasing the investment limits for the company and for the individual.

When the business opens its doors then it’s essential that it has the right people doing the right jobs at the right time within the business. This is the “staying in” phase. That requires that such staff be appropriately remunerated, and we all know cashflow in a fledgling business might just not be there in the early stages. Therefore, giving employees a piece of the action may be an attractive and appropriate way to remunerate staff in those situations. That is possible through various share schemes and a few years ago we brought about the Key Employee Engagement Programme or the appropriately names “KEEP”. We know the take-up on KEEP has been low and therefore it needs to be amended to help it achieve “keep” its namesake.

The KEEP regime has certain conditions regarding employee remuneration. Some point out that employees hours may have been reduced over the past while because of Covid19 and therefore such a link to remuneration may no longer be appropriate for such individuals. Many have asked that the company be allowed to buy the employee’s shares back from them without income tax rates applying to any gain arising thus maintain the incentive nature of the regime. You can see the point given the disparity that can exist between income tax as an employee and capital gains tax which generally will apply as a shareholder.

While I’m on that latter point, it was previously reported in these pages that a reduction in the Capital Gains Tax (CGT) rate was mooted last year but not all parties agreed with that approach. Regular readers of this column will know my view that the rate of CGT should be reduced. As we know, in 2002 when the 40% CGT rate was halved the yield on CGT increased substantially with the result that it became very clear that the rate of CGT hugely influenced its yield in a very different manner from other forms of tax. It wasn’t to be in the last Finance Act but given where we are right now then any increased yield that can be brought about without increased pain is something that, in my view, should continue to be considered.

Moving on to the “passing on” of the business phase. If you invest in an EIIS company and it succeeds, then, just like any other investment, you pay CGT on any gain arising when you sell the shares. Fair enough, although other countries allow an exemption on such gains where certain Ts and Cs are met. So, in Ireland there’s no incentive between investors where a gain arises.

However, when an investor makes a loss on disposing of their investment in EIIS shares then that loss may not be allowable for CGT purposes. Had that investor put his or her money or savings into a non-EIIS company and lost money on that investment then they would have been allowed to use that loss in reducing other capital gains in the same or future years. Exiting an investment is just as much a consideration when thinking about whether to make such an investment in the first instance. How many times do we sweat the negative stuff when making any investment decision, what happens if things don’t turn out as planned etc? However, bringing about a form of loss relief on EIIS investments would serve to reduce, but not eliminate, some risk when investing in such companies and by definition increase the attractiveness of such investments to would-be investors.

How true it is to say that you can't always get what you want, but if you try, sometimes you can find you get what you need. There are so many considerations that can be thought about in connection with entrepreneurial activity which could serve to increase the attractiveness of investing into a start-up company at the time when that company needs the cash. Budget 2022 is only around the corner and many decisions will need to be made. We should choose wisely.

Please note this article first featured in the Business Post on 8 August 2021 and was re-published kindly with their permission on our website.

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