arguably that prior Budgets have focused on tax measures to attract Foreign Direct Investment and that supportive tax measures for small businesses and entrepreneurs have received less attention. With the advent of improved technology, the option for Irish entrepreneurs to move their base outside of our shores is now a live one as many of them can easily conduct their business across borders. Therefore the need to encourage new entrepreneurs and support existing entrepreneurs is vital in ensuring the medium to long term health of the Irish economy.
Deloitte’s view is that while the measures introduced in Budget 2016 with regard to an additional income tax credit for self-employed individuals and the reduced Capital Gains Tax (“CGT” ) rate of 20% are welcomed, more could have been done to ensure that entrepreneurs are no longer over-taxed and underappreciated. This article looks at a number of measures which would help in offering entrepreneurs a truly competitive tax environment in which they can expand and contribute to a strong indigenous Irish sector, and in turn show that the Government is casting a vote of confidence in the SME sector for long term growth. We also illustrate the potential benefits of each measure using evidence from similar schemes in the UK.
Importance of Entrepreneurs to the Irish Economy
Small and medium enterprises right across the length and breadth of Ireland are imperative to our economic health and their importance cannot be overstated. SMEs, of which the majority are owned and operated by entrepreneurs, account for 99.7% of all enterprises and 68% of all employment. Some such as Kerry Group, CRH and Glanbia have progressed to become major international players in their respective industries.
This importance is particularly evident in the Western Region where many individuals work in industries whose backbone is provided by entrepreneurs. Construction, accommodation and food, agricultural, industry and the retail industry account for over 50% of total employment in the West of Ireland.
If Ireland wants to present itself as an entrepreneurial hub in a competitive environment for investment then it must remain competitive from a tax perspective. If we don’t align our tax policy to support entrepreneurs, they will simply go elsewhere in the pursuit of a better deal and we will be unable to generate the tax revenues needed to sustain our economy in the medium term.
Enhanced Entrepreneur’s CGT Relief
In his Budget announcement Minister Noonan launched a new reduced CGT rate of 20% for entrepreneurs who decide to sell part or the entirety of their business. The new rate applies to the first €1 million of qualifying gains and the normal CGT rate of 33% will kick in for any proceeds exceeding this amount. We welcome the introduction of this reduced rate but we feel that more could be done in altering the Irish CGT landscape to further reward successful entrepreneurs.
The need for further relief is illustrated when compared against the equivalent UK CGT scheme - the UK Entrepreneur Relief in effect grants a CGT rate of 10% on the first £10 million of qualifying gains. The existence of this relief in the UK puts Ireland at a distinct competitive disadvantage, insofar as the Irish CGT landscape for entrepreneurs is far less rewarding for successful entrepreneurs.
As part of the Government’s consultation process, Deloitte recommended a change to the Irish CGT structure in some form of tapered tax relief in such a manner that the applicable rate of CGT would be reduced on a pro-rata basis, depending on the length of ownership in the relevant asset.
It is clear to see that by introducing a form of tapered CGT relief that it will reward entrepreneurs and will encourage an individual to invest in their business over 15 to 20 years as the tax landscape will be favourable towards long term investment.
Earned Income Tax Credit
The Budget acknowledged the discrepancy in the tax treatment between PAYE employees and the self-employed and sought to address this by introducing an Earned Income Tax Credit for those who do not currently have access to the PAYE tax credit. The credit will have a value of €550 per year. It was indicated that this was the first step and that further measures will be implemented to equalize the status of the self-employed and employees. While this is a start, it does not equalize the tax treatment as employees are entitled to an annual tax credit of €1,650. In addition, it was disappointing to the see that there was no reduction in the 3% additional USC charge for self-employed individuals earning over €100,000. The Government needs to recognise that self-employed individuals who are described as the “cornerstone of our economy” also fall into the “squeezed” middle category. This equalisation at a minimum, needs to be addressed as a priority. Minister Noonan did acknowledge that this is start to tax equalization for self-employed individuals so we should expect to see further changes in upcoming Budgets.
Passing to the next generation – Agri-Tax Relief
Even for the most successful entrepreneur, there comes a time where they must consider succession planning and how to effectively pass their business to the next generation. In this instance, Capital Acquisitions Tax (“CAT” ) becomes an important factor. We welcome the increase in the CAT Category A threshold to €280,000 but we would further recommend that the CAT rate is lowered in tandem with the CGT tapered relief outlined above.
Minister Noonan made reference in his Budget announcement of the importance of the agri-food industry to the Irish economy and he has announced a number of tax measures to encourage further investment in the sector.
The most interesting measure to be introduced is a new proposal in relation to the transfer of a family farm. The proposal outlined the set-up of a partnership between at least two partners with provision for profit-sharing between the partners and for the transfer of the farm to the younger farmer within a 10 year period. An income tax credit of €5,000 per annum for five years will be allocated to the partnership and split in accordance with a profit-sharing arrangement between the partners. It should be noted that this measure is subject to state-aid approval and cannot be considered final until the EU provides their confirmation.
Ireland has made great strides in its economic recovery and many multi-national companies would agree that the current Government has succeeded in its long term ambition in making Ireland one of the best small countries in which to do business. Unfortunately, the majority of entrepreneurs operating in Ireland would feel that their contribution to the national economy is not being supported by the tax regime currently in place. The new measures included in Budget 2016 are to be welcomed but more could be done to foster an enterprise culture in Ireland. It’s time for the Government to cast a vote of confidence in Irish entrepreneurs. We hope that future Budgets stay the course and Irish entrepreneurs finally feel that their contribution to the national economy is being fully supported by the tax regime in place.
Brian Farrell is a Tax Director with Deloitte based in the Galway office. He can be contacted on 091-706030.