Ireland’s domestic private and family-owned businesses form the backbone of the economy and play a critically important role in society. According to employer body Ibec, they account for 99 percent of active enterprises and 70 percent of private sector employment in Ireland.
The latest Statista report states that in 2023, there were approximately 1.17 million people employed by indigenous Irish companies. So how are they managing at a time of change and uncertainty and have policy makers got it right? Alan Bromell, Head of Private Enterprise at KPMG, considers the issues.
Facing the future with optimism
In 2023, KPMG conducted research to find out how these businesses were faring in an era of inflation, resourcing issues, lightning-fast technology change and sustainability challenges. The KPMG Enterprise Barometer 2023 found a high degree of resilience along with measured confidence in the future amongst Irish businesses and entrepreneurs but also uncovered some of the serious challenges facing them.
These challenges include inflationary pressures, difficulties in recruiting and retaining staff, a heavy tax burden, digitalisation, and sustainability issues.
Among the most striking findings of the research was that less than a quarter (24 percent) believed that the tax regime in Ireland encourages entrepreneurship and growth. Over half of the respondents (57 percent) expressed concerns about the administrative burden attached to the Irish tax regime, particularly for smaller businesses and entrepreneurs.
Sixty per cent of the respondents to the survey expressed concern about the impact of rising inflation. Increased labour costs were a significant concern for 43 percent, over two-fifths (42 percent) said energy was the main driver for the increase in the cost of doing business, with supply chain (27 percent) and wage inflation (22 percent) also cited as factors in cost pressures.
Recruitment and retention were also rated among the most serious challenges, with 52 percent saying they needed help to attract and keep talented employees. Taxation was cited as a significant contributory factor with respondents calling for improvements to the Key Employee Engagement Programme (KEEP) and the extension of the Special Assignee Relief Programme to indigenous companies among other measures.
Alan Bromell
Keeping Ireland competitive
Ireland has made its deep pool of highly skilled highly productive workers a key element of its offering to inward investors. That will no longer be sustainable if we do not pursue tax policies that foster high levels of labour participation. Our personal tax regime must be seen as attractive relative to what is on offer in other countries.
Incentivising and supporting domestic entrepreneurship should be a key focus for Irish tax policy to stimulate economic growth, maintain Ireland’s reputation as an international hub for innovation and collaboration, and support the resilience of the domestic enterprise sector.
The reality is that entrepreneurs, both foreign and domestic, can and do move location based on changes to the business and taxation environment. Entrepreneurial investment can be significantly influenced by targeted, pro-growth and appropriate tax policies and Ireland faces competition from other countries in Europe and beyond for that investment. Ireland’s tax policy should support enterprises and entrepreneurs seeking to access risk capital and talent, both of which can represent significant constraints for entrepreneurs seeking to build businesses of scale.
The modelling of tax reliefs and incentives needs to recognise the significant spin-off benefits to the economy of certain so-called “tax cuts” through dynamic modelling.
Budget 2024 measures enterprises and entrepreneurs
While Budget 2024 did make some welcome tax changes, more is needed to make a significant difference to Irish entrepreneurs and their businesses.
Adjustments to personal tax rates were more or less in line with inflation and while not making the current position any worse they did not improve Ireland’s attractiveness as a place to live and work relative to other countries. How we tax dividends paid to founders needs to change to remove the bias towards an exit, oftentimes too soon and before Ireland has borne the full fruits of these promising businesses.
More positively, changes to the R&D Tax Credit were very welcome, particularly for firms investing in smaller projects.
There is a strong case to be made that entrepreneurs should be subject to a tax regime that would be on a par with Capital Gains Tax (CGT). This would have to be subject to certain conditions and qualification criteria, of course. Access to finance is another issue. Many businesses are left with the two main pillar banks as their main source of credit. The alternative is non-bank lenders which can be quite expensive.
Alan Bromell
Funding growth
There was welcome news recently that Finance Ireland had become the first non-bank lender to join the Government's €500 million Growth and Sustainability Loan Scheme for Irish SMEs which is aimed at providing competitively priced loans to SMEs. Consideration could be given to bolstering this scheme with additional funds. Given that it is a loan scheme this would be cost neutral for the exchequer and should pay dividends in the form of employment creation and increased economic activity in the longer term.
Digitalisation is no longer an opt-in or opt-out choice for businesses, regardless of size. The same applies to ESG. Larger SMEs will have to comply with the Corporate Sustainability Reporting Directive (CSRD) from 2026 while large corporates are baking sustainability into their procurement policies with the effect of pushing ESG metrics into their supply chains. Lenders too are increasingly employing ESG screening when making credit decisions.
The Government is already playing a role in supporting domestic enterprise in these areas, but those efforts should be redoubled to ensure that Irish companies have the capacity to keep pace with the digitalisation and ESG agendas. State enterprise support agencies should be given the resources to assist domestic business to invest in these two critical areas.
Looking head
We believe there is much to be excited about and look forward to in 2024, notwithstanding the challenges of the world we live in today. Irish companies will be fine and continue to excel on the world stage if they continue to back themselves. It’s critical that Government policy continues to do the same.
Get in touch
Whether you are establishing or scaling a new venture, planning an investment or exit, we are here for you. We can help you on issues of cash, working capital and efficiency. If you are looking ahead and coming up with a digital strategy, our experts can work with you.
Contact Alan Bromell of our Private Enterprise team. We look forward to hearing from you.
Alan Bromell
Partner, Head of Private Enterprise
KPMG in Ireland