Pre-Budget Submission – Budget 2018
SMEs are the backbone of our economy. They employ almost 1 million people and are geographically dispersed throughout the country. In fact, the SME sector is the single largest contributor to the exchequer year after year. According to the European Commission report on SMEs for 2015, Irish SMEs contributed €50.5 billion directly to the Irish economy and account for 97% of all businesses operating in the country.
The average number of startups on a monthly basis for the first six months of 2017 was 1,500 with almost 50% of those based in Dublin. There is also an imbalance with regards to the business sectors with approximately 40% entering the financial services sector. However, there was also a 13% increase in insolvencies for the first half of this year.
Not many people are willing to take personal, professional and financial risk to start and grow their own business. The challenges are significant and the risks are high. According to the Bank of Ireland approximately 66% of startups fail within the first five years of trading.
Ireland has a relatively unattractive regime for people taking the risk of starting a business. The number of startups in Ireland is one of the lowest in the European Union.
Small and medium sized Irish businesses face a number of threats over which they have little or no control over and, at a time having being fortunate to survive the most severe recession in living memory.
Such macro-economic factors include Brexit, current US economic policies, EU policies and regulations, potential interest rate increases, inflation/deflation changing bank lending requirements and increased focus on personal guarantees, foreign exchange fluctuations, oil price fluctuations, increasing acts of terrorism, and the growing threat of external competition as markets become more volatile and unpredictable.
A total of €6.1 billion in bad debts were recorded for 2016. This extremely high level of bad debts destabilizes many small businesses.
The Government has an opportunity in this year’s budget to provide the platform which will encourage more entrepreneurs to start their business and, for existing businesses to commit to growth and increased employment.
The budget recommendations below have been formulated as a result of meetings and discussions with a wide range of business owners and entrepreneurs and, if implemented will provide a stepping stone for indigenous Irish businesses to grow and increase their already significant net contribution to the Irish economy.
Tax policy can be one key part of an overall proactive business policy. However, a long term macro strategy needs to be articulated in order to create a healthy business environment for sustained and stable economic growth. Therefore, I suggest that the tax policies articulated in the 2018 budget forms part of a greater, balanced and sustained strategy for Irish entrepreneurship.
Considered here are a small number of cost effective key economic drivers which can easily be introduced in this coming budget to facilitate support for Irish SMEs:
- Staff recruitment, training and retention
- Funding for startups and creating stable growth
- Creating regional balance
Corporation tax rates have a significant effect on the strategy direction of Irish SMEs as retained earnings are the mainstay for reinvestment in growth, expansion and diversification. Thus an internationally competitive corporation tax rate directly stimulates stability and investment. It is recommended that the current corporation tax rate remains at 12.5%. This will have a positive effect on exchequer finances as it provides much needed confidence and stability for small businesses to grow which will, in turn increase corporate tax take.
Maintain the current VAT rate of 9% for the Tourism and Hospitality sector. This is particularly important given the most recent Fáilte Ireland/CSO figures highlighting the decline in UK tourists, which is Ireland’s largest and most important market. The industry prediction is that the future of the UK tourism market is unstable and declining. We therefore need to be as competitive as possible against worldwide competition. This is revenue positive for the exchequer. This continuing commitment maintains the status quo and would be revenue neutral for the exchequer.
The tourism industry is particularly important to regional and rural Ireland. On a macro-economic level, Government strategy should encourage private investment in rural and regional tourism activities (both capital and operational investment). This strategy can best be achieved by offering ring fenced and structured tax incentives such as the extension of the Employment Incentive & Investment Scheme (EIIS) and other tax efficient investment models for a clearly defined time frame. This facilitates an opportunity for review. An effective EIIS scheme has the benefit of attracting private investment for key economic purposes. Taxation policy is but one of the key economic levers in creating an investor and entrepreneurial lead environment.
Capital Gains Tax should be reduced in line with the UK standard rate. Also, the qualifying gain under Entrepreneur’s Relief (introduced in the 2015 budget) should be increased to €10 million in order to improve the attractiveness of Ireland to investors and to encourage increased investment in Irish business. Estimated gross annual cost to exchequer of €30 million before benefit flow of increased indirect tax income.
Greater flexibility with regards to the relief should be introduced to encourage SME owners to dispose of shares in certain circumstances. This initiative promotes an increased market for the sale of and investment in existing SME businesses. This increased activity stimulates further exchequer income both directly from CGT and other taxes (such as stamp duty on disposals etc).
From an employee perspective, the marginal rate of tax should be reduced to below the 50% threshold. According to the OECD, Ireland has the most progressive income tax system in the EU. The extra disposable income will promote increased economic activity and indirectly promote employment as well as indirect tax income for the exchequer (such as VAT on the sale of goods and services). IBEC estimate this initiative to cost approximately €158 million annually. This does not take into consideration the extra indirect tax revenue generated from increased disposable income. Also, International Tax income elasticity studies indicate net exchequer diminishing returns as taxes increase above certain thresholds (Mertens, 2013).
Ireland’s employee share ownership scheme is out of date and require immediate overhaul. This is a very important facility for companies whereby they can offer attractive shareholding options to key employees in order to retain experience, skills and to both stabilize and grow their businesses.
The 2017 budget introduced an SME focused share based incentive scheme both in the startup and growth stages.
However, the UK Enterprise management incentives for SMEs should be considered and remodeled to ensure that the initiative is “fit for Irish SME’s purpose”.
Extend the scope and flexibility of the Revenue Approved Save as you Earn (SAYE) and Approved Profit Sharing Scheme (APSS) and facilitate both investor and employee dividend payment at a 10% tax rate. This increases the opportunity for key employees to benefit from their business growth and prosperity. It also assists SMEs to retain key employees who otherwise can be attracted by larger and financially more successful businesses both in Ireland and abroad. This incentive can be structured whereby the maximum annual direct exchequer cost is €10 million.
The Government should stop the discrimination between self-employed and PAYE earners. A time line should be put in place to remove the USC charge on self-employed and create equity with their PAYE colleagues. Estimated annual cost of €20 million.
A tax break should be available for both SMEs and individuals who contribute in excess of €250 in any one year directly to a registered charity, a Department of Education & Skills approved educational establishment or a recognized sporting organization. SMEs are significant regular contributors to such community based organizations. This support directly reduces the dependency on exchequer support and needs to be acknowledged and recognized. It is proposed that the existing legislation be amended and simplified whereby the donor as well as the beneficiary benefits from the contribution. There should be an upper limit on the annual amount the SME or individual can reclaim as a tax deduction. The estimated annual cost would be €5 million.
Senator Pádraig Ó Céidigh