Budget Must Break Down Entrepreneurial Barriers

The Government must create a coherent tax strategy for Ireland’s entrepreneurs, similar to that which was developed for the IFSC.

That was the message delivered by a panel of entrepreneurs and experts at a joint Irish Tax Institute and Dublin Chamber of Commerce pre-Budget event this morning. The panel highlighted that there are significant tax barriers holding back investment when businesses are starting and scaling and stressed that Ireland’ tax environment was in stark contrast to that of the UK.

The options put forward by the panel for such a flagship policy change were: a reduction in the Capital Gains Tax rate for entrepreneurs, addressing the unfriendly share options regime for small business, or a tax credit for Employer PRSI on new hires in micro businesses.

Speaking at the event, Greg Clarke, Dublin Chamber President and founder of Digicom, noted an increase in the number of businesses seeking to relocate to the UK due to a more attractive tax environment for startups and small firms. Mr Clarke, said: “Ireland needs to be as attractive to indigenous business as we aim to be for FDI. The tax system as it stands says ‘don’t start a business, go work for a big multinational’. We’d be better partners for multinationals if we had a stronger indigenous business base.”

Also speaking at the event, Irish Tax Institute President Ms Mary Honohan, said Ireland’s only real tax measure (EII – Employment and Investment Incentive) to attract funds for entrepreneurs has become so restrictive that the value of funds invested through it have actually halved since 2011. This is in stark contrast to the two main entrepreneur focused tax measures in the UK which grew by 100% and 50% respectively between 2012 and 2014.

Ms Honohan said: “Our policies are not attractive enough. Investors are mobile and can make clear comparisons of the return on their investments across jurisdictions. We hear feedback day after day that the tax environment for entrepreneurs and investors in Ireland has become more challenging, particularly when compared with the UK’s tax rates.”

Penal system for talented hires that are given shares to ‘come on board’ – unusual by international standards
The new Irish Tax Institute President said: “Another really challenging element of our tax environment is the penal regime for any share options that are given to the talented new hires that are needed to make new young start-ups successful. Many new young start-ups cannot afford the high salaries that are required to attract in talent at the early stage and so share options in the company are their only way of rewarding those who come on board.”

Ms Honohan said the talented employees who are very often are the ‘make or break’ employees in the business are forced to pay income tax when they exercise their share options and explained that this was unusual by international standards.

“The UK has an attractive regime designed to help small, higher risk companies recruit and retain employees who have the necessary skills to help them grow and succeed. Ireland needs something similar and we need it soon”, she concluded.

Both the Dublin Chamber and Irish Tax Institute’s pre-Budget submissions, highlight the problem arising from Ireland’s 33% capital gains tax on entrepreneurial activity compared to the 10% available through UK scheme.

Potential for Micro Firms to Create 80,000 New Jobs
Dublin Chamber’s pre-Budget submission notes that micro firm – those with between 2 and 9 employees – are currently required to pay 10.75% tax on each staff member they employ. The Chamber has recommended that this tax be waived for three years, to make it more attractive for firms to create new jobs.

According to Mr Clarke: “Employer’s PRSI is currently the same regardless of the size of the business. Small growing businesses are taking a chance with each new person that they take on. The Government’s current approach to Employer’s PRSI often makes it just too big a risk to take. Removing the PRSI burden will get more people working in small businesses. If each of the 80,000 micro businesses in Ireland hire just one extra person it would bring the unemployment rate down by a third.”

The Chamber said it welcomes the Government’s reported greater focus on encouraging entrepreneurship in Budget 2016. However, their submission says that more must be done to support entrepreneurs and owners through all stages of the business cycle, including through periods of growth and scaling.

To achieve this, and to bring Ireland’s tax set-up in line with what is on offer to entrepreneurs in the UK, the Chamber’s submission also includes the following recommendations:

• Introduce an entrepreneur CGT relief (10% rate) similar to the UK Entrepreneurs’ Relief
• To compete with the UK’s EIS and SEIS regimes, replace EII second tranche relief with an exemption from CGT on sales of shares acquired under the EII system.