Planning eases growing pains

Economic recovery has made it a busy time for small firms but owners must do things smartly, writes Pat Sutton

THE improved economic conditions in Ireland are providing a lot of opportunity for SME growth. The increase in economic activity in general over the last three to four years has seen an upsurge in SME activity with business expansions and the next generation being brought on board at companies as owners find themselves able to retire.

The increased activity has led to an upsurge in staff buy-ins, competitor takeovers, business disposals, business restructuring to cater for expansion, new structures to control tax leakages such as overseas vehicles, incorporation of sole trades, group structures, partnerships and joint ventures. It is a busy time.

But in many cases business owners are not aware what they need to do to manage change efficiently or what reliefs are available to minimise taxes. Here are five key areas business owners need to be mindful of as they work hard to grow and take advantage of the increased opportunity.

1 RETAINING KEY STAFF USING REWARD SCHEMES

A downside to the improved economic conditions for SME’s is the struggle to hold on to top-class employees. Employers are having to go above and beyond the normal salary package. More and more companies are looking at reward schemes and other such initiatives for key employees.

The fact is that SMEs are struggling to hold onto key employees using pay increases. Instead key staff want profit participation or ownership, perks, flexible hours, modern work environments and so on.

SMEs have been slow to use share options or profit incentives as they think they are for the ‘big boys’. The truth is that they probably don’t understand them or believe they may complicate the running of the company or future sale.

What SME’s should be aware of is that the Government introduced a new Share Option Scheme in Budget 2018 called the Key Employee Engagement Programme — KEEP for short.

Unfortunately, the Government has attached one too many conditions, making it more complex than it needed to be hence the take-up has been low. But the scheme is there to be used and with a little more improvement this scheme could be a massive help to SMEs in retaining staff.

2 MANAGING BUSINESS AND TAX RISK

As SMEs grow and become more profitable, their structures need to evolve to manage business risk and tax risks. Without the right structures in place, risks may be exposed which can be detrimental if something goes wrong. For commercial and tax reasons, businesses should be looking at their structures on a periodic basis in order to safeguard shareholders’ interests.

So, for instance, some business might look at creating a group structure where they would separate out property assets from trading assets as different risk ratios often apply here. For obvious reasons, SMEs need to routinely check their structure and make sure it’s fit for purpose. Otherwise, all those long hours could be for nothing.

3 SUCCESSION PLANNING

We all agree that SME owners are some of the hardest-working people in our economy. Yet when it comes to planning for succession and bringing in the next generation it’s often left on the long finger with no real thought.

This can create all sorts of issues such as tax exposures, financial stress and family relationship breakdowns. It is incumbent on practitioners to get SME owners thinking who will take over the business or will the business be sold in future? Every case is different. Some SMEs already have a successor identified, others have no children or relatives interested in taking on the business. Maybe an employee might be interested in purchasing it? Without proper planning, CGT on business disposal and CAT on gifts may be an issue.

Fortunately, there are tax reliefs available but conditions must be satisfied. This is where you need to plan to ensure these conditions are met. Planning for these eventualities should take place years in advance — it’s too late when the transaction is about to happen.

On the subject of succession, the current Capital Acquisition Thresholds are simply not sufficient in any way to cover even the most basic asset transfers to the next generation. Lifetime transfers to children over €310,000 are taxed at 33pc. It’s not that long ago since this threshold was more than €500,000. If the Government is advocating a fair and equitable taxation system this is one threshold that needs to be looked at seriously if we are to avoid children being taxed out of homes when receiving inheritances.

4 CGT ENTREPRENEUR RELIEF

There has been a steady increase in SME disposals in years, and entrepreneurial relief is now commonly used to minimise Capital Gains Tax ‘CGT’ on the disposal of SME businesses.

In simple terms, it works by applying CGT at 10pc on the first €1m chargeable gain per individual, with 33pc applying to the remaining chargeable gain.

However, as has been widely reported, the UK has far more advantageous Entrepreneur Reliefs, so the Irish Government must start delivering on promises to improve this scheme by moving that €1m threshold closer to the UK’s £10m limit. There is an ever-increasing risk of entrepreneurs looking to the UK to set up businesses if this is not addressed in the next budget or two.

5 FARMERS

Farmers are the largest SME business in rural Ireland. Over the years, unique tax incentives have been introduced such as stock relief, profit averaging and accelerated capital allowances. In the last five years, the Government has introduced a €25,000 tax credit over five years to encourage the passing over of the family farm through a registered succession farm partnership.

As a result, there has been a significant uptake in registered farm partnerships for non-dairy operations. For dairy farmers, they are in rapid expansion mode so they are looking to corporate structures to lower their tax, to reinvest surplus funds and pay back debt tax efficiently. In summary, the taxation and advice requirements of farmers need an experienced farm tax adviser to provide the very best tax planning to them.

Share and profit schemes are not just for the ‘big boys’