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Budget 2016 is next week, and businesses all over the country will be watching with expectation. With the Coalition Government committed to full employment by 2018, it needs creative solutions to stimulate the SME sector. Here we ask Michael O’Leary, tax partner with JPA Brenson Lawlor, Chartered Accountants & Registered Auditors, his opinion on what could be done to give SMEs a boost in the budget.
1: Make the EIIS Scheme more effective
In general, this scheme provides for an income tax deduction for money invested in a company. The rules relating to what type of companies qualify widened in 2014 and the EU Commission is due to approve the changes shortly. However, to increase the effectiveness of the scheme the following should be considered:
- The process for claiming relief should be simplified, it takes too long to get approval
- The income tax relief should be claimed in the year the investment happens and not in year one (30%) and year four (10%) of a holding period
- The tax relief can be claimed in respect of any previous tax years so that the investment can be split, so all relief happens at the highest tax rate.
The above will make EIIS more attractive to both business owners and outside investors.
2: Encourage more bank borrowings using tax reliefs
For business owners that are finding it difficult to borrow from their bank, the introduction of enhanced tax relief would both encourage investment and give more comfort to the bank.
For example, corporate borrowers could obtain tax relief similar to the research and development tax credit.
A credit of 25% of the interest paid would be offset against the corporation tax liability of the qualifying company. The total tax benefit for the company would be 37.5%, i.e. at the normal tax deduction for the cost of the interest and the additional 25% tax credit.
For individual borrowers, an income tax deduction should be introduced for business owners that borrow personally and invest in their companies. Also, EIIS qualifying investments funded by borrowings should qualify for tax relief.
3: Reduce the Capital Gains tax rate
The existing capital gains tax rate of 33% is acting as a real disincentive to business owners. Some take the view that there is not enough of a gap between personal taxes and capital gains tax to provide an appropriate return. Also for those retiring from their business, the rate does not encourage them to move on. Therefore, a structure where the rate lowers depending on the years of ownership of a business would be better. However, there is some argument to say that the rate that applies to non-business assets such as investment property should remain high.
4: What ideas could be ‘borrowed’ from other countries to encourage SME activity?
Ireland should compare itself to the UK in terms of the tax incentives for young companies.
Introduced by the UK Government in 2008, ‘Entrepreneurs’ Relief’ provided a reduced 10% rate of capital gains tax on the first £1m in capital gains earned by a proprietary director.
This scheme has been so successful that the lifetime limit went from£5m in 2010 to £10m in 2011. Also, the UK has operated a patent box regime since April 2013. Ireland is only getting around to this now.
A more attractive capital gains tax rate for certain business will encourage entrepreneurs to invest and reinvest in new businesses. This will help create employment.
