Business and entrepreneurship

Taxation of entrepreneurs and small business is an issue which has received a lot of warranted attention in recent times. The signals we send through our tax system, however, differ greatly from the rhetoric. Improvements were made in Budget 2016 but Budget 2017 must build on these.

Commitments need to be followed through; with changes to taxation the single biggest step the Government can make to encourage more people to go into business for themselves. With the higher rate of USC for the self-employed and the higher rates of CGT introduced in recent years, our tax system has gone in the opposite direction to much of enterprise policy. If we are truly serious about creating a highly-skilled entrepreneurial economy the level of recognition which has been given to the issue needs to be backed by action.


Issue 9: Taxation of the self-employed


Ibec recommends

The lack of an equivalent earning income tax credit (EITC) for the self-employed is not supported on any reasonable basis. The Government should commit to rectifying this situation over the medium-term. The Government should extend the modest EITC for self-employed persons in Budget 2017.


How Ireland will benefit

Entrepreneurs play a crucial role in the Irish economy. The Irish tax system, which today sends very mixed signals to entrepreneurs, must transition toward one which champions entrepreneurship. To achieve this, we need to see changes which make it more attractive for people to take on the burden of risk, expand their businesses and invest their time and money in the things which create jobs and wealth. Targeted tax reforms focusing on entrepreneurship can support a more dynamic domestic enterprise base. This applies not only to capital taxes but also to income taxes.



Issue 10: CGT entrepreneurs' relief

Ibec recommends

Without significant improvement in the treatment of capital gains relative to the UK, Ireland risks losing high potential SMEs to the UK. This is a particular concern in areas such as manufacturing and agri-food where reliance on the UK market is highest. The commitment in the Programme for Government leaving future changes for start-ups alone would be wholly inadequate in this context. Budget 2017 should see Ireland improve its offering significantly when compared with the UK by increasing the lifetime limit from €1 million to €15 million in Budget 2017 and reducing the rate under the relief to 10%.


How Ireland will benefit

Changes to the CGT entrepreneur’s relief in Budget 2016 provided some boost for growing SMEs but they did not go far enough. The outlook for high potential Irish SMEs has changed in a post-Brexit environment.



Issue 11: Seed Enterprise Investment Scheme (SEIS)

Ibec recommends

An introductory version of the SEIS scheme similar to its UK equivalent would remove a barrier to small start-up businesses, while also encouraging first-time investors into the market. A 50% income tax credit on investments in new or micro-firms on similar terms to the UK scheme should be introduced in Budget 2017.


How Ireland will benefit

The SEIS scheme has the advantage of being more attractive to small-time investors who can invest up to £100,000 in a single tax year over a number of companies. They receive a 50% tax credit on their investment which is sufficiently attractive to bring new investors to small firms with limited avenues of funding half of the investments in the UK were of less than £10,000 showing the scheme’s ability to attract non-traditional investors into the market in small sums. This is partly due to the fantastic branding of the scheme and its ease of use. A similar angel investment tax incentive would boost non-traditional financing for start-up firms and micro-enterprises in approved sectors.



Issue 12: R&D tax credit administration

Ibec recommends

Previous changes to the legislation which allowed companies to show the credit ‘above the line’ greatly improved the attractiveness of the scheme to many businesses at no extra cost to the exchequer. The change in accounting treatment meant that businesses could use the credit more effectively when competing for mobile R&D projects on a pre-tax assessment basis with other jurisdictions.

The Government should now build on this progress by changing the R&D legislation to provide companies with an option to claim the R&D tax credit at 37.5% ‘above the line’ while foregoing the associated corporate tax deduction at 12.5%. This would lead to a 50% increase in the potential ‘above the line’ credit.

The denial of a corporate tax deduction at 12.5% on qualifying R&D expenditure means that the proposal is a cost neutral one from the exchequer perspective, and will result in the same level of overall tax payable as is presently the case under current legislation.


How Ireland will benefit

Neither change would incur any exchequer cost and would substantially improve the operation of the scheme from a business point of view.



Issue 13: R&D tax credit and SMEs

Ibec recommends

The administrative costs associated with the R&D tax credit are too burdensome for smaller firms to participate with the credit. A pro-forma R&D tax credit should be introduced to help smaller firms overcome these costs and engage with the credit. This would include the use of pro-forma templates for R&D project management, recording R&D activity and calculation of eligible costs and revenue benefit associated with the credit. Simple online calculators demonstrating the benefit and eligibility rules of the credit would be a useful resource for SMEs and would also greatly improve awareness and promotion of the scheme.


How Ireland will benefit

The R&D tax credit has been a successful model in encouraging Irish companies to invest in R&D and create value in the economy. In line with international research, an Ibec study showed that for every €1 given in tax credit to participating firms they spend in the region of an additional €1.25 on R&D over and above what they would otherwise have spent. Recent studies in the UK show this additional expenditure is much larger for SMEs (Nguyen & Van Reenan, 2016) at €2.60 while others suggest that it could rise as far as €3.60 in the long-run.



Issue 14: Management training incentives

Ibec recommends

Incentives for staff in SMEs to take on management training should be extended. A targeted management training incentive aimed at the point of transfer of family business in the first instance should be introduced. This would be achieved by relieving from capital acquisitions tax completely (currently 90%) the transfer of a business where the recipient of the business has taken part in approved management training schemes.


How Ireland will benefit

Management and skills are key components of business growth in any economy. Research has shown internationally that improved management skills can improve sales growth, market share growth and lead to higher productivity. Indeed, recent research (Bloom et al, 2016) shows management skills account for up to 50% of the productivity differential between developed countries and the US.



Issue 15: Town centre regeneration

Ibec recommends

The establishment of a competitive tendering process open to towns and cities around the country that would give access funding to support the regeneration/development of their town/city. This funding could in turn support the resource requirement which exists in such towns/cities in the form of a Town Centre Manager who would have responsibility for encouraging the development of commercial centres in towns/cities. Such an initiative could be run in conjunction with the roll out of a Town Centre Strategic Development Plan as devised by a sub-group of the Retail Consultation Forum.


How Ireland will benefit

The regeneration and revitalisation of our towns and villages will make them more attractive places to live and work and enhance their potential to provide employment, commercial opportunities, social and cultural facilities into the future.

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