Small and medium-sized enterprises (SME) are regularly described by Government as being the “backbone” of the Irish economy and the Government has been conscious to present itself as being acutely aware of the role that indigenous SMEs play in job creation. The Government is also mindful of the need for Ireland to remain competitive so that the country stands out as an attractive place for SMEs and entrepreneurs alike to establish and grow their businesses. Olivia Lynch, of our Private Enterprise team, investigates.
The Government’s particular focus on SMEs is also based on the growing desire to broaden the corporation tax base and to reduce reliance on the tax receipts from the highly concentrated multinational sector. While progress had been made in recent years in supporting the development of small and medium-sized business, and in fact according to Revenue prior to the pandemic, the growth of such business outpaced that of larger companies, this section of the economy has been disproportionately impacted by Covid-19.
With this in mind, Budget day was a key opportunity for Government to push forward its agenda in supporting the SME sector and certainly some of the measures which were announced were clearly and specifically targeted at this sector and supporting its post-Covid recovery. Questions remain however whether more can be done to support domestic enterprise, although in some cases further detail is awaited on specific measures (due to be announced in the upcoming Finance Bill) and so it may yet be too soon to reach a final conclusion on the effectiveness of the overall Government package.
12.5% corporation tax rate
While not a Budget day measure, clearly the most important recent development in terms of tax for Irish business was the pre-budget confirmation that the 12.5% corporation tax rate will continue to apply to the roughly 160,000 domestic SMEs who together support 1.8 million jobs in the State.
This has clear implications for all SMEs across Ireland for whom the lower rate of corporation tax provides a valuable benefit. More and more Irish businesses are turning to the export market as well as looking to the international market for funding, so retaining the 12.5% corporation tax rate for these businesses allows them to compete with similar-sized businesses established elsewhere.
Reliefs for SMEs
Employment Investment Incentive Scheme
The Employment Investment Incentive Scheme (EIIS) has previously been touted as a valuable but underused relief. The EIIS essentially provides for income tax relief for individuals investing in certain businesses, with the objective of promoting investment in the start-up and early stage sectors. The scheme has now been extended for a further three years, having originally been due to come to an end on 31 December 2021, underlying Government’s commitment to resolving take-up issues with the relief and to increase the availability of capital funding for SMEs.
In addition, certain technical elements of the relief are also being relaxed with a view to enhancing its attractiveness, with fuller details to be confirmed following the consultation process which took place earlier this year. In the meantime, of note is Minister Donohoe’s comment that the scheme will be opened up to a wider range of investment funds. This is a potentially significant development as any relaxation of the rules on the classes of investor actually able to claim relief – which is currently relatively limited – could go a long way in broadening the scope of the regime and could have a significant impact on the uptake of the scheme. In particular, a relaxation of the connected party rules in line with the UK approach which only restricts “connected” investors where they hold a 30% or greater interest in the EIIS company, would increase Ireland’s competitiveness by ensuring that such investors are not encouraged to take their investment outside of Ireland due to unduly strict domestic rules.
Other changes include allowing greater scope for investors to redeem their capital without penalty, and removal of the rule that 30% of an investment in an EIIS company must be spent before relief can be claimed. While it is unlikely that the latter change will lead to a material increase in uptake of the scheme, any simplification in the administrative requirements required to claim a tax relief is always welcome.
There are a number of potential enhancements to the scheme which could be effective in increasing its uptake. This could include relaxing the rules on CGT loss relief for loss-making EIIS investments to more closely align with the equivalent UK rules which effectively allow CGT loss relief on failed or loss-making investments, or even offering CGT relief for profits made on profit-making investments. Along the same vein as removal of the 30% rule noted above, consideration could also be given to further easing the administrative requirements for EIIS claims by providing for automatic refunds of cash claims below a de minimis threshold so as to reduce delays currently being experienced within the existing system.
Given the growth in savings accumulated by many people over the Covid period, it would be an ideal time to try and funnel some of this capital into the start-up/early stage economy as EIIS investments in order to further develop this sector. Another suggestion to route these savings into investment in Irish businesses would be to introduce targeted capital gains tax relief to encourage investment in Irish SMEs, based on certain conditions perhaps tied to employment growth, the green agenda etc.
Innovation Equity Fund
The theme of increasing funding for the SME sector is continued in the Government’s announcement to commit further investment into the Ireland Strategic Investment Fund which has a mandate to invest in “domestic, high innovation enterprises”. A further €30 million commitment from Government, combined with EU and co-investor funding is expected to lead to up to €90 million of potential funding which is to be targeted primarily at “seed stage” Irish SMEs. It is hoped that this fund will fill at least some of the funding gaps which might be not be filled by the proposed enhancements to the EIIS. It is worth noting the Minister’s comments that the use of the funding will be consistent with other priorities such as “promoting regional development, supporting female entrepreneurship, and climate change initiatives”. Important objectives which will hopefully become clearer when the scheme is launched in early 2022.
An extension was also announced by the Minister to the corporation tax exemption for certain start-up companies. The regime broadly operates to reduce the corporation tax payable by certain new businesses by reference to their employer PRSI costs, with the intention that the benefit would be most directly targeted at businesses which create and maintain employment.
While it is difficult to conclude with certainty the precise impact this measure has had on enterprise, there is certainly some evidence to suggest that start-up relief has been a factor in improved survival rates for new enterprises since its introduction in 2009, and this points to the regime’s continued importance in the post-Covid landscape. The Department of Finance’s estimates show that the relief costs an average of just €348 per annum per job supported. This compares favourably with jobseeker’s benefit, the cost of which to the Exchequer can reach over €10,000 per annum per individual.
Previously scheduled to expire for companies commencing a new trade up to the end of 2021, the scheme will now run until at least 2026. An extension has also been announced to the period for which the relief is available – from three years to five – which will allow businesses a further two years to further establish themselves, hopefully aiding survival of more small businesses and (at least partly) counteracting the effects of Covid-19 which has disproportionately impacted smaller enterprises. While the two year extension is certainly welcome, the Government’s review suggests that this extension is more or less aimed at ensuring that the relief remains available for businesses interrupted by Covid over the last two years, rather than providing an additional incremental benefit for SMEs. It is perhaps disappointing that the changes have not gone further than simply seeking to put businesses in the position they would have been had the Covid crisis not taken place. A further extension of this relief to target businesses “restarting” after the Covid crisis would offer invaluable and timely supports to businesses struggling to survive having reopened in many cases with reduced capacity or having to adopt a different business model.
While further changes aimed at optimising the relief were proposed as part of the Government review, these were not included in the Minister’s Budget day speech. Given the apparent efficiency of the relief in supporting job creation, continued investment by the Government in continuing to optimise and improve start-up relief as it applies to fledgling businesses would appear well-advised. It will be interesting to see what, if any, further changes are made to start-up relief when the full detail of changes are released in the Finance Bill later this month.
In addition to the pre-existing regimes discussed above, a number of Covid-related emergency measures, many of which are especially relevant to the SME sector, are being extended beyond their initially-proposed termination dates in recognition of the continued challenges faced by many businesses.
The Employment Wage Subsidy Scheme, which during its lifetime has supported over 650,000 workers, will not operate on a cliff-edge and will instead run until April 2022. Tapered relief will apply with the existing two-rate structure of €151.50 and €203 being replaced by a flat rate subsidy of €100 for March and April 2022. Also in March and April 2022, the 0.5% reduced rate of employer’s PRSI will cease and the full rate will apply. The scheme will also close to new employers from 1 January 2022.
For hospitality, arts and tourism-related businesses which were particularly hard hit by the pandemic, there was some further relief in both the confirmation of the extension of the commercial rates waiver – now extended until the end of 2021 (previously scheduled to terminate at the end of September) – as well as confirmation that the reduced VAT rate of 9% for the tourism and hospitality sector will remain in place up to the end of August 2022. There is also a further €100m of funding being made available to this sector over the coming year.
Missed opportunities for boosting our domestic economy
While there were certainly some clear actions taken by the Government to promote entrepreneurship and the domestic SME landscape, the general emphasis in this year’s budget on health, housing, environment and managing the cost of living meant that some additional measures which many had speculated might be provided for were not included in the Budget proposals.
Entrepreneur relief and CGT regime
Noticeably absent from the Budget announcement was any change or extension to the scope of existing entrepreneur relief, or more broadly, the general capital gains tax regime. This is especially notable in light of the Government’s previous commitment to review capital gains tax with the objective of “supporting innovation driven enterprises”.
An increase to the entrepreneur relief threshold from the existing lifetime limit of €1 million would have been most welcome. Indeed, a recent review carried out by Indecon economic consultants recommended an increase in the lifetime limit to €10 million - €15 million, while the Department of Enterprise Trade and Employment (DETE) suggested retaining the existing €1 million instead as a “per venture” rather than a lifetime threshold. Despite this, there was no announcement in the Budget in relation to changing the entrepreneur relief thresholds or limits.
Another proposal which was seemingly overlooked in the Budget, despite recent calls by DETE, was the extension of entrepreneur relief to passive or angel investors by removing the current working time conditions which require that an individual must spent at least 50% of their working time in the investee company. Given that no changes were proposed in the Budget day speech, this might be considered another lost opportunity to further incentivise domestic investment, particularly in light of Minister Donohoe’s recent comments that the CGT system must balance revenue raising with relative international tax competitiveness. It may however be overly hopeful to expect the relief to be extended to cover such investors in the near further given that any other recent changes to the regime have shied away from rewarding passive investment.
Similarly, other changes such as reducing the headline rate of CGT from the current 33% rate (high by international standards), introducing a CGT investment relief as noted above, or applying a lower rate of tax to dividend payments from qualifying investee companies (dividends are currently taxed at combined income tax and social security rates of up to 55%), were not adopted by the Government. The possible reduction of the rate of tax for dividends could have wider economic benefits as it would remove the current incentive for entrepreneurs to sell out at the earliest possible stage in the business’s development (i.e. to avail of the lower rate of tax on capital gains) and would support the possibility of founder entrepreneurs remaining in Ireland and holding their interests in the business as it grows and matures.
Given the lack of acknowledgement of these proposals in the Budget day releases, it is hoped at the very least that they remain on the table for further consideration in the future.
While revenue-raising measures offer an immediate appeal for the stretched Government purse, the example above for the start-up relief shows that a tax cost can translate into wider Exchequer savings when other factors are taken into consideration. In light of the Government’s general aim of supporting the SME sector, as well as the obvious links between entrepreneurship and job creation, and the wider associated economic benefits, any further proposals could certainly provide well-timed and much-needed boosts to the domestic Irish economy and its post-Covid recovery.
This article originally appeared in the Business Post Budget 2022 magazine in association with KPMG, and is reproduced here with their kind permission.
Get in touch
The pace of change is challenging leaders like never before. To find out more about how KPMG perspectives and fresh thinking can help you focus on what’s next for your business or organisation, please get in touch with Olivia Lynch, tax partner. We’d be delighted to hear from you.