Tax incentives that will help Irish startups

How business owners fare in Ireland in comparison to the UK is not good for Ireland. John Fisher of Smith & Williamson looks at what can be done to keep Ireland’s brightest business people in Ireland.

The SME sector is the heartbeat of the economy and its continued recovery is essential to deliver economic and job growth. It’s vital that existing and future business owners have the appropriate tax environment to encourage them to take necessary risks and to progress from initial to subsequent investments.

Current tax rates among the highest in the OECD

Government policy in the years of the recession was to increase taxes so as to reduce the budget deficit targets set by the Troika (European Commission, European Central Bank and the International Monetary Fund). Marginal tax rates have increased from 46.5% to 55% for entrepreneurs including the universal social charge (USC) and pay related social insurance (PRSI).

These marginal income tax rates are now among the highest in the OECD. The capital gains tax (CGT) and Capital Acquisitions Tax (CAT) rates have increased by 65% from 20% to 33%. The thresholds at which CAT applies have approximately halved. It’s uncertain if these changes are short term, which makes the investment environment uncertain for investors and entrepreneurs.

Following a dip in 2014, the number of entrepreneurs starting new businesses is increasing.

However, the market for international entrepreneurial investment is equally mobile and competitive and the tax environment in Ireland for this type of business has become much less favourable in recent years. The emphasis needs now to change in order to attract this internationally mobile wealth generating resource to Ireland.

Steps taken so far to promote business

Since the current Government came into office, some welcome measures have been introduced to stimulate investment and improve the tax environment for entrepreneurs and SMEs. These include:

  • CGT Entrepreneur Relief, launched in 2013
  • the Employment and Investment Incentive (EII) introduced to replace the Business Expansion Scheme
  • the Start Up Relief for Entrepreneurs (SURE) introduced to replace the Seed Capital Scheme
  • extension of the VAT cash receipts basis.

Irish v UK comparison for investors

In the Global Entrepreneurship Index over the last three years, Ireland has ranked 17th (2015), 18th (2014) and 17th (2013). The UK has seen a stellar rise in the same index, rising from 14th in 2013 to 4th in 2015 (9th in 2014). In another metric, the Global Innovation Index, Ireland ranked 11th in 2014 (down from 10th in 2013) while the UK ranked 2nd in 2014, up from 3rd in 2013.

In 2011, 24,000 people started a new business in Ireland (0.53% of the population) compared to 440,600 in the UK (0.68%).

In 2012, 19,000 people started a new business in Ireland compared to 484,224 in the UK. 

In 2013, the figure in Ireland was 32,000 (0.7%) and in the UK it was 526,447 (0.8%). 

The figure for 2014 in Ireland is not yet available but in the UK it was 581,173.

What the numbers show is a clear increase in new business activity, especially in the UK. 

When you compare tax rates on profits and dividend income for Irish resident investors versus UK resident investors, in Ireland they pay 55% while in the UK they pay 47% on profits and 37.5% on dividends. 

The tax rate on exits after five years in Ireland is 33% while in the UK it is just 10%, assuming the investor qualifies for Entrepreneurs’ Relief. 

Ireland needs to make changes

So what needs to be done? The number of people starting new businesses is increasing again. But if we look to the UK, even taking account of their much larger population (64.1 million in the UK as compared with 4.5 million in Ireland), and the different measurement bases, there is opportunity for further growth. However, we need to make changes.

Below are changes and incentives that are required, subject to EU state aid rules. Regardless of budgetary constraints, these changes need to be made now. The longer we wait the greater the risk of Ireland falling further down the pecking order when it comes to investors choosing their location. The changes are:

  • a clear and targeted lower CGT rate for entrepreneurial gains is required. A 10% rate or lower, to compete with the UK, should apply to the disposals of investments in certain business assets and shares, subject to certain conditions.
  • a deferral mechanism should also be in place so that where the proceeds of a disposal are reinvested in another qualifying business, any CGT arising at that point would be “rolled over” and would not be due for payment until the subsequent acquisition is disposed of.
  • a targeted tax relief is required for individuals making loan capital investments in SMEs, to provide important alternative sources of funding.
  • SMEs require a ‘Knowledge Development Box’ that imposes low compliance costs and provides certainty of treatment for them. As broad a definition as possible is needed for assets that are functionally equivalent to “patents”.
  • the additional 3% USC payable on annual self- employed earnings over €100k is a penalty on entrepreneurship and should be abolished in Budget 2016.
  • the PAYE tax credit, currently available only in respect of certain employees should be extended to all employed and self-employed income earners.
  • a tax effective share incentive regime is urgently needed for both startups and growing SMEs to enable them to attract the key staff they need to drive their business through the initial early years (when so many businesses can fail).

These measures are not optional if the economic recovery is to continue.

Keep the best and brightest in Ireland

Entrepreneurs are highly mobile and, without action to address tax incentives in this area, not only will Ireland lose the potential economic contribution created by start-ups, more importantly we may end up losing some of our brightest people and the opportunities they bring with them.