We need to talk about small business
It’s good to talk. Right now, we’re in the middle of a public consultation process in connection with tax incentives for the Small and Medium Enterprise sector. This process is part of the preparations for Budget 2020 and the related Finance Bill. This process ends on May 24th so the clock is ticking to air your views. As I’ve always said Consultation with us decreases Consternation amongst us so let’s talk.
The consultation concerns three forms of tax relief being (a) the Employment and Investment Incentive (EII), Start-Up Refunds for Entrepreneurs (SURE), Start-Up Capital Initiative (SCI), (b) certain share scheme reliefs for employees known as the Key Employee Engagement Programme (KEEP) and (c) Entrepreneur relief for Capital Gains Tax (CGT) purposes. Put another way this process looks at tax relief for getting in, remunerating employees of, and getting out of an enterprise.
The consultations effectively question the good, the bad and the ugly of these reliefs with a view to hopefully(!) making them best in class. Not too shabby in theory…
The first mentioned relief was overhauled in the most recent Finance Act. It sought to make it easier to access the relief. EII gives tax relief of up to 40% in respect of investments made in certain corporate trades. Initial tax relief of 30% of the amount invested is provided with potentially a further 10% available three years after the initial investment where certain employment/R&D conditions are met.
The SURE targets those who were previously in PAYE employment or recently unemployed and are looking to set up a new company. It provides tax relief in the form of a refund of PAYE paid by claimants of up to 41% of the capital invested in the new business. Under SCI companies can raise up to €500,000 from investors who are connected with current shareholders where certain conditions are met.
Finance Act 2018 sought to make it easier to claim the above and to address the law’s previous design flaws, which had resulted in delays in the application process. The consultation document outlines a number of other fixes, too many to go into here, but one suggestion was that full relief should be provided in the year in which the investment is made. Appropriately done I’d go with that as jam today is better than jam tomorrow but importantly, the more certainty surrounding an investment the more likely that it may be made. There are other valuable proposals but we have two more reliefs to look at!
Once you’ve made the investment then humans are needed to keep the show on the road. “Keep” is the operative word here because there’s a relief for that. Finance Act 2017 brought about the Key Employee Engagement Programme (KEEP) to give employees a tax efficient piece of the action. The Minister for Finance said as part of last year’s budget that take-up wasn’t what he thought it would be. KEEP is a share-based remuneration package for employees of certain SME companies allowing employees to suffer Capital Gains Tax (CGT) at 33% on a gain arising on the disposal of the shares acquired which is a potentially substantial saving on the applicable income tax. The irony of a “relief” allowing a tax “suffering” is clear but at least it eases the suffering!
Last year the Minister sought to make KEEP more attractive to employers by increasing the maximum value of share options that could be granted to an employee in one year to 100% of the employee’s emoluments (previously 50%). Previously the total market value of all shares, in respect of which qualifying share options have been granted by the qualifying company to an employee, couldn’t exceed €250,000 in any 3 consecutive income tax years but the Finance Bill replaced that with a lifetime limit of €300,000. An unusual move as it arguably made the scheme less attractive.
The Consultation document outlines many potential fixes. One of which begins by explaining that businesses that carry out ‘financial activities’ are excluded from KEEP. The argument is made that the definition of financial activities, as contained in the Taxes Acts, is too broad in scope and has the effect of excluding FinTech and InsurTech SMEs from participation in KEEP. The recent “Ireland for Finance” document published by the Department of Finance contains the strategy for the development of Ireland’s international financial services sector to 2025. That document outlines four pillars; the first of which deals with the key enablers necessary to ensure that Ireland has an effective and efficient operating environment. One element of the discussion outlines the policies aimed at supporting the industry’s development and includes KEEP as an example. Therefore the suggested amendment above would be welcome and in line with Government proposals.
Lastly, entrepreneur relief looks to getting out of the investment when the time comes. It provides a 10% rate of CGT in respect of capital gains made on disposals of qualifying business assets on or after 1 January 2016 up to a lifetime limit of €1m. To qualify, among other conditions, an individual must own at least 5% of the business and have spent a certain proportion of their time working in the business as a director or employee for three out of the five years, prior to disposal. The UK offers a 10% rate on £10 million on their equivalent so we have catching up to do.
Like the others the document outlines suggested fixes. One of which includes changes to involve passive investors. That would facilitate the entrepreneur in persuading other investors to join his or her cause. Money must be spent to be made and money made is subject to tax!
Woody Harrelson in the 2016 movie “Triple 9” famously speaks of the “Instagoogletweetface” phenomenon. Where will “Instagoogletweetface v2.0” come from? So let’s update the reliefs so that version 2.0 can more easily materialise in this country as opposed to with our competitors.
Tom Maguire is a tax partner with Deloitte and his column on tax matters appear in the Sunday Business Post. The above column was first published on 19th May 2019.