Budget 2021 will be like no other for Ireland’s SMEs

The Covid-19 crisis, a looming no-deal Brexit and more lockdown restrictions will see a Budget like no other for Ireland’s SMEs says PwC’s Daniel O’Beirne.

The economic impact of Covid-19 has given rise to worrying levels of unemployment and has put a massive strain on the Exchequer.

This, together with Brexit-related risks, will shape the business environment for Irish SMEs for many years to come.

“With the wellbeing of many parts of the SME sector at stake, Budget 2021 is without doubt going to be one of the most important in recent memory”

Owners of SMEs, like never before, need to make decisions that are right for themselves, their family, their business and those employed in their business. It is therefore crucial that measures are implemented in Budget 2021 to support SMEs.

Employment supports

The Covid-19 crisis has seen the Government implement initiatives such as the Employment Wage Subsidy Scheme (EWSS) and its predecessor the Temporary Wage Subsidy Scheme (TWSS). Although these supports have been welcomed by employers, the continuing economic impact of Covid-19 means that more measures, such as the following, could be considered:

  • Extension of the EWSS and the reduced Employers PRSI rate: It is important that the end dates for both of these measures are kept under constant review given that the duration of the pandemic is so uncertain.
  • Digital skills and remote working: Covid-19 has resulted in SMEs expanding their e-commerce capabilities at a time when many employees are working remotely. An enhanced tax relief for employers for the cost of upskilling employees and supporting remote working is therefore needed. 
  • Key Employee Engagement Programme (KEEP): Non-cash forms of remuneration, such as equity, can be vital during economic shocks. To support this, further changes and enhancements to KEEP would be helpful. 
  • Pension payments: The tax relief for employers on pension contributions could be moved from a paid basis to an accruals basis, subject to caps and time limits for making the payments.
  • VAT: Lower VAT rates can drive the sales that are needed for businesses to remain viable. Further targeted VAT measures could be deployed to support severely impacted sectors. This could include reverting to the reduced VAT rate of 9pc for the tourism and hospitality sector as well as a permanent reduction in the standard rate to 21pc. 

Supporting private sector investment

Targeted initiatives to encourage investment in the private sector would restore balance sheets that have been depleted by Covid-19 related losses. The various State sponsored funding schemes have given a great lifeline to SMEs but these need to be supplemented by appropriate tax supports to encourage private sector investment, such as the following:

  • Employment Investment Incentive (EII): Further enhance the EII for new equity investments by allowing relief for USC in addition to the 40pc income tax rate. The equivalent UK legislation allows a 50pc relief for investments in seed stage companies.  
  • Loan capital relief: A relief similar to EII could be introduced in respect of loans provided by individuals to SMEs.
  • Start-up Relief for Entrepreneurs (SURE): The SURE relief is targeted at individuals who leave PAYE employment to start their own business. To date, the uptake of the scheme has been disappointing, so we would recommend that an awareness campaign is introduced.

Business succession and transition

In PwC’s latest Global NextGen Survey, the NextGens told us they are ready to make their mark, especially around digital transformation. Amending the tax system to facilitate the orderly transition of ownership to next gen’s has never been so important.The following measures could help to address the above:

  • CGT retirement relief and CAT business relief: The rules related to CGT retirement relief and CAT business relief should be more closely aligned. The 90pc cap on CAT business relief should also be removed, as should the €3m cap on CGT retirement relief for persons over 65.
  • CGT rate: Ireland’s CGT rate of 33pc is one of the highest in the OECD. A time limited reduction in the rate should reduce CGT as a barrier to the circulation of capital.
  • CGT rollover relief: The reintroduction of this relief would allow shareholders to defer the incidence of CGT if they reinvest the sales proceeds into a new business.

Recent announcements from the Government point to the fact that the focus of Budget 2021 will be on protecting employment and stimulating the economy rather than changing the income tax rates and bands.

With the wellbeing of many parts of the SME sector at stake, Budget 2021 is without doubt going to be one of the most important in recent memory. 

Young man with dark hair.

Daniel O’Beirne is Tax Manager at PwC Ireland’s Entrepreneurial & Private Business Practice