There are some de­fi­cien­cies in the Ir­ish tax code that, un­less they are ad­dressed, may ul­ti­mately im­pact neg­a­tively on this coun­try

Irish Independent - Business Week - - John Byrne -

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THERE are, of course, great sim­i­lar­i­ties be­tween the tax regimes in both ju­ris­dic­tions, with Ir­ish schemes very of­ten largely mir­ror­ing their UK equiv­a­lents. There are some wor­thy re­liefs for busi­ness in Ir­ish tax law and in some cases the Ir­ish treat­ment is more favourable than in the UK.

In com­par­ing the two ju­ris­dic­tions, how­ever, it is hard to es­cape the con­clu­sion that in re­cent years we have fallen be­hind the UK in this area. In ad­di­tion to sig­nif­i­cant cuts to UK Cor­po­ra­tion Tax (with the prom­ise of more to come) blunt­ing the com­pet­i­tive ad­van­tage of the 12.5pc Ir­ish rate, the UK has a par­tic­u­lar edge in ar­eas such as:

n Tax rates on in­come and cap­i­tal gains;

n Tax treat­ment of share­holder div­i­dends; n Share-based re­mu­ner­a­tion; n En­tre­pre­neur Re­lief on the sale of a busi­ness; n Close Com­pany Rules; n Treat­ment of the Self-em­ployed un­der the Na­tional In­sur­ance sys­tem.

In the con­text of Brexit, there is also the con­cern that sub­se­quent to its exit from the EU, the UK may use the tax sys­tem to gen­er­ate a com­pet­i­tive ad­van­tage. In par­tic­u­lar, it may have greater flex­i­bil­ity to in­tro­duce tax in­cen­tives for busi­ness that are not sub­ject to State Aid reg­u­la­tions or EU ap­proval. This would surely have se­ri­ous im­pli­ca­tions for Ire­land.

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Cap­i­tal tax rates were in­creased sig­nif­i­cantly in Ire­land dur­ing the re­ces­sion­ary years; the head­line rate for busi­ness dis­pos­als now stands at 33pc, in con­trast with a rate of 20pc in the UK. This is a sig­nif­i­cant dif­fer­ence and, while both ju­ris­dic­tions al­low for a spe­cial 10pc on some busi­ness dis­pos­als, as we will see be­low the UK re­lief is po­ten­tially more lu­cra­tive and eas­ier to claim.

The head­line rates of in­come tax – 20pc and 40pc – are the same in both ju­ris­dic­tions, although the UK does have a 45pc rate for in­comes above £150,000. One could there­fore be for­given for as­sum­ing that there was lit­tle dif­fer­ence in this area.

When you cut through the com­plex­i­ties of the two sys­tems, how­ever, it be­comes ap­par­ent that for mid­dle-in­come earn­ers the treat­ment in the UK is more be­nign; in the first in­stance a sin­gle per­son be­comes li­able to the 40pc rate in Ire­land once their earn­ings ex­ceed €34,550 per an­num in con­trast with their UK coun­ter­parts who may earn Stg£46,350 (ap­prox­i­mately €52,000 at cur­rent ex­change rates) be­fore do­ing so. Fur­ther­more, in the UK na­tional in­sur­ance con­tri­bu­tions are re­duced to 2pc on all earn­ing above that level.

As the ta­ble be­low, com­par­ing the Ir­ish and UK tax treat­ment of an em­ployee earn­ing be­tween €50,000 and €85,000 this has two sig­nif­i­cant out­comes, namely:

By the time an in­di­vid­ual is earn­ing £46,350 / €52,000 the ef­fec­tive rate of tax in Ire­land is al­ready higher than in the UK;

As the in­di­vid­ual’s salary in­creases above this level, the mar­ginal rate of tax in the UK is eight to 10 per­cent­age points lower than in Ire­land.

This acts as a penalty on suc­cess­ful en­trepreneurs in Ire­land but it also im­pacts on em­ploy­ees, who see half of any bonus or salary in­crease (for ex­am­ple from a pro­mo­tion) gone on taxes, thereby adding to the chal­lenges of staff in­cen­tivi­sa­tion for em­ploy­ers.

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In ad­di­tion to be­ing im­pacted by higher tax rates on salaries, the owner of an SME may also feel a lit­tle hard-done by when the tax­a­tion of div­i­dends in the two ju­ris­dic­tions is con­trasted.

In Ire­land they are treated in the way as any other in­come and so po­ten­tially li­able to In­come Tax, USC and PRSI of up to 52pc.

In the UK, how­ever, a spe­cial rate of tax ap­plies to div­i­dends so that most share­hold­ers with tax­able in­come of less than £150,000 a year will only pay a tax rate of 32.5pc on div­i­dends, ris­ing to 38.1pc if their an­nual in­come does ex­ceed this amount. This is con­sid­er­ably lower than the Ir­ish rate and, notwith­stand­ing that they are not de­ductible against tax­able prof­its for cor­po­ra­tion tax pur­poses, ÷ rules

The con­cept of a close com­pany is in­te­gral to tax leg­is­la­tion in both ju­ris­dic­tions; in broad terms, most pri­vately owned busi­nesses are classed as close com­pa­nies.

This gives rise to a num­ber of spe­cial rules and re­stric­tions; many of these are un­der­stand­able, be­ing de­signed to dis­cour­age own­ers from treat­ing the com­pany’s as­sets as their own by, for ex­am­ple tak­ing ex­ces­sive pay­ments or loans from the com­pany. Un­like its UK coun­ter­part, how­ever, the Ir­ish leg­is­la­tion has taken this a step fur­ther by im­pos­ing ad­di­tional taxes on cer­tain in­come of Close Com­pa­nies, prin­ci­pally:

n A 20pc sur­charge on post-tax in­vest­ment in­come such as rents, in­ter­est or div­i­dends;

n A sur­charge of 7.5pc on the post-tax prof­its of pro­fes­sional ser­vice com­pa­nies car­ry­ing on a wide range of busi­nesses such as auc­tion­eers, man­age­ment con­sul­tants, en­gi­neers, quan­tity sur­vey­ors or com­puter pro­gram­mers.

These sur­charges will ap­ply un­less the com­pany then dis­trib­utes the in­come to its share­hold­ers by way of div­i­dend; os­ten­si­bly the rea­son for this is to dis­cour­age peo­ple from us­ing com­pa­nies to earn in­come that would tra­di­tion­ally have been earned by in­di­vid­u­als and so sub­ject to in­come tax. This is surely an out­dated mind­set and re­sults in ad­di­tional com­plex­i­ties or tax bur­den for SMEs.

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Rais­ing cap­i­tal is near the top of the agenda for any startup or ex­pand­ing busi­ness. The flag­ship schemes in both ju­ris­dic­tions are quite sim­i­lar – in fact,

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