KAREN FRAWLEY
Irish Tax Institute
Tax experts who advise Ireland’s corporates and SMEs are never short of suggestions for the minister for finance ahead of the annual October Budget. During his tenure in the role since June 2017, Fine Gael TD Paschal Donohoe has been more of a steady-as-she-goes type of minister than a radical like Charlie McCreevy, whose priority was to foster enterprise.
The Donohoe years have been marked by rising expenditure and a rising tax haul, and reforms to incentives and reliefs have generally been at the margins. With a huge hole in the public finances due to Covid, Budget 2022 is unlikely to contain many business tax novelties. Indeed, the temptation for the minister will be to squeeze more revenue from business to help narrow the massive budget deficit, however, another factor is at play.
Donohoe has reserved Ireland’s position on the OECD global tax reform agreement, currently under discussion. The expectation is that changing the rules around taxation of multinationals will result in a loss of c.€2bn in corporation tax receipts over the short-to-medium term. Less clear is the impact of any global minimum tax rate on Ireland’s economy.
Assuming a decline in this important tax source, the Irish Tax Institute argues that there is a need to focus on building productivity, innovation, management capacity and export activity in the SME sector.
‘Just as tax has played an effective and legitimate role in attracting foreign direct investment, it can also be deployed to considerable effect to help build a high-performing SME sector,’ notes the Institute in its preBudget submission.
Institute president Karen Frawley notes that the finance minister’s immediate priority is to protect jobs.
“In that context, he needs to support viable, compliant businesses as they seek to return to pre-Covid trading levels,” says Frawley. “For businesses in sectors like hospitality and retail, the return to pre-pandemic levels will be an uphill struggle.
“Keeping cash flow in these businesses will enable them to retain their staff and perhaps hire more workers as they rebuild. There are several ways the minister can use the tax system to keep cash in businesses at this critical time. These include allowing corporation tax balances due in 2020 to be warehoused, extending the temporary accelerated loss relief measures for a further year, and retaining the reduced statutory interest rate of 3% on overdue taxes.”
Frawley adds that in the Budget, Donohoe should bring forward a legislative amendment to address the difficulty facing directors and employees, with a material interest in a company that cannot claim credit for PAYE, that has been deducted by the business, and is now warehoused.
“Unless they themselves qualify for income tax warehousing, these taxpayers face a tax liability that could erode all their income. It’s an anomaly that has emerged from the warehousing facility and it needs to be addressed,” says Frawley.
Every year, tax advisers pay close attention to four business incentive schemes in particular:
• the Employment Investment Incentive (EII);
• the R&D Tax Credit;
• the Key Employee Engagement Programme (KEEP); and
• the Start-Up Relief for Entrepreneurs (SURE).
l These schemes and programmes are tweaked regularly in Finance Acts, though never to the point where everyone is happy. This year it could be the turn of more reform for the EII, which was subject to a consultation this year.
According to Frawley: “The
EII scheme has a critical role to play in the recovery. We hope that the changes made on foot of this year’s consultation will make it more attractive to investors, and more user-friendly for the startups and SMEs that depend on it to raise much-needed funds to rebuild and grow.”
She adds that the administration involved in the EII application process for small and micro businesses is onerous and needs to be streamlined.
“Non-mandatory template forms for business plans, cash flows and the like should be adopted by Revenue for EII purposes,” Frawley suggests. “We also recommended in our submission that dedicated Revenue
personnel with technical and commercial knowledge of the complicated EII rules should be assigned, to ensure consistency in dealing with applications in a timely manner.”
In interviews with tax experts for this survey, most criticism was reserved for how the Key Employee Engagement Programme operates. KEEP is meant to give indigenous SMEs a fighting chance in competing for talent with multinationals, and the professional consensus is that the programme needs an urgent overhaul to make it more user-friendly.
Like most tax advisers, the Irish Tax Institute believes that the Capital Gains Tax rate of 33% is too high. “The low level of receipts in recent years suggests the rate is dampening transactions and productivity in the SME sector,” says Frawley. “We know from experience that reducing the rate can stimulate activity and increase the yield to the Exchequer.”
The rates for CGT and Capital Acquisitions Tax loom large for private and family businesses when it comes to organising the efficient and affordable transfer of business assets. PwC tax partner Colm O’Callaghan is of the view that the retention of these businesses by their Irish founders is important because many of the firms are central to the economies of the rural areas in which they are situated.
PwC argues that high capital taxes are preventing or delaying the efficient passing of wealth. In this regard, PwC and the Family Business Network have called for temporary measures to reduce gift tax liabilities, in order to encourage a transfer of wealth. Such measures would include:
introducing a temporary reduction in the CGT and CAT rates to 20% (from 33% currently) for a period of two years, and raising the gift and inheritance threshold from parents to their children to €500,000 (currently €335,000);
removing the arbitrary €3m cap on the value that can qualify for CGT Retirement Relief, on the transfer of shares for those aged 66 and older for a period of two years, with a further review to take place at that time;
removing cash as a non-qualifying asset in trading businesses for CAT Business Property Relief purposes;
similar to the UK, considering introducing mechanisms to facilitate the transfer of businesses to the next generation without incurring upfront punitive tax costs, e.g. an ‘upfront instalment’ of the Gift and Inheritance Tax, with any balance of tax being spread over a long-term period of at least 10 years; and
lastly, increasing the lifetime limit for Entrepreneur Relief to €5m.
“The current limit of €1m is out of kilter with the marketplace and, in most cases, does not provide enough incentive for entrepreneurs to dispose of their businesses and reinvest in new businesses,” says O’Callaghan.