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