Budget 2024 makes significant changes for entrepreneurial business

17 October 2023

There are two mantras that I always cite in this column when it comes to investment: (1) cash is the lifeblood of business and (2) simplicity eats complexity for breakfast. Both were addressed in this week’s budget when it came to entrepreneurial business. Critically the devil will be in the detail in the forthcoming Finance Bill which puts the Budget measures into law.

Getting cash into these companies’ hands can be helped by favourable tax treatment of investors. The minister said that he was enhancing the EIIS by standardising the investment period to four years for all investments and doubling the amount an investor can claim relief on for four-year investments to €500,000. He explained that these enhancements would “help unlock more equity investment in smaller, early stage, businesses which are typically most in need of funding”.

My second mantra came up as part of this discussion when the minister said his officials will also undertake “a further review of EII in early 2024 which will focus on the potential for further simplification of the scheme, while taking account of the conditionality imposed by the EU General Block Exemption Regulation”. The latter regulation is something to watch as part of the Finance Bill process and the review is welcome.

Making investment into these companies more attractive was further added to by tax relief for exiting the investment. We’ve had entrepreneurial relief with significant Ts and Cs for some time now and it allowed a 10% rate of Capital Gains Tax (CGT) on qualifying gains arising on the disposal of qualifying business assets. However, that relief did not apply to angel investors. So, a new relief was brought about in the budget to cater for these rather than tweaking the old one.

This new-fangled relief will be available to an individual who invests in an innovative start-up small and medium enterprise (SME) for a period of at least 3 years. The investment by the individual must be of fully paid-up, newly issued shares costing at least €10,000 and constituting between 5% and 49% of the ordinary issued share capital of the company. The scheme will include a certification process, which will be carried out by Enterprise Ireland, to ensure, as the documentation explains, that the relief is targeted at innovative SMEs that can demonstrate financial viability and compliance with the requirements of the EU General Block Exemption Regulation. Qualifying investors may avail of an effective reduced rate of CGT of 16%, or 18% if through a partnership, on a gain up to twice the value of their initial investment. There is a lifetime limit of €3 million on gains to which the reduced rate of CGT will apply. Absent that relief, CGT would be payable on those gains at 33%.

The Finance Bill will outline the Ts and Cs in connection with the above and the extent of meaning of an innovative start-up small and medium enterprise (SME) will be critical. Because there is a 3-year ownership requirement, the summary of Budget measures estimates this will cost the Exchequer €55m, but that won’t kick in until 2027. The cost benefit analysis of the pre-existing entrepreneurial relief explains that it cost the Exchequer €143 million in 2021 being the most recent year for which data is available. The new relief will, ballpark, cost almost one third of the most recent numbers available for a relief that wasn’t previously available to angel investors.

The R&D credit saw an increase from 25% to 30% bringing about increased cash availability to those companies who are eligible. The Minister explained that this will “maintain the net value of the existing credit for those businesses subject to the new 15% minimum effective tax rate, while also delivering a real increase in the credit to those smaller companies who will not be in scope of Pillar Two”. I’d agree with his assessment of the 15% rate as a “once in a generation reform” given the amount of legislation that will be needed to bring it into law. I took over the authorship of a leading text on corporation tax a number of years ago and it was recently suggested to me that this year’s edition might need a second volume to deal with these changes. We will have to see on that one!

But back to R&D. the increase in the credit is a good move for many reasons, and the Minister doubled the first-year refund threshold from €25,000 to €50,000 as he said “to provide valuable cash-flow support to companies engaged in smaller R&D projects”.

All of the above deals predominantly with my first mantra. But when it comes to investment, simplicity eats complexity for breakfast. The Minister addressed this noting Revenue will, in the coming weeks, establish a dedicated Tax Administration Liaison Committee (TALC) subgroup focused on identifying any opportunities to simplify and modernise the administration of business supports. TALC is a group made up of tax practitioners and Revenue where the parties come together to deal with matters of interpretative and administrative difficulty. The Terms of Reference of this subgroup will be agreed at TALC and a report on the recommendations of the subgroup will be delivered during the course of 2024. It’s good to see the timeline here in that hopefully we will see some of the suggestions come about in next year’s Finance Bill.

As a member of Scale Ireland’s Steering Committee, I was chatting about the Budget with its CEO Martina Fitzgerald and Chair Brian Caulfield. It is a non-profit organisation representing Irish start-ups and scale-ups. Martina explained that she saw Budget 2024 as a boost for Irish start-up and scaling companies. She further said that “Budget 2024 delivers for the indigenous tech sector with important and tangible changes for Ireland’s entrepreneurs and founders. The increase in the R&D credit rate will incentivise increased R&D activity and spending in our sector. We also welcome the pledge to look at simplifying state supports and reliefs which has been a key issue for our members. It is vital that these schemes are fit for purpose and we welcome Minister McGrath’s commitment to look at this”. Brian noted that the “ownership requirement of a minimum of 5% is problematic. Very few angel investors reach that threshold. We hope to engage with the Minister to ensure this is addressed in the Finance Bill”.

Overall Budget 2024 outlines some beneficial moves for entrepreneurial companies. So here’s to a similar Finance Bill!
 

Please note this article first featured in the Business Post on Sunday, 15 October 2023 and was re-published kindly with their permission on our website.