Business Groups Push Key Budget Reforms
As Michael McGrath prepares for his first Budget, the Irish Tax Institute warns that current business supports aren’t working, writes
The upcoming budget in October will be the first for Fianna Fáil finance minister Michael McGrath (47), a chartered accountant who should understand how business works. Since assuming the role in December 2022, the Cork politician has toed the Department of Finance line, more or less.
McGrath ignored his civil servants in February 2023, when the reduced VAT rate of 9% was due to revert to 13.5%. He implemented a five-month reprieve until the end of August, when restaurants, hotels and other hospitality enterprises were once again clobbered with the higher tax rate.
All year, minister McGrath has been banging on about bumper corporation tax revenues being a threat to national finances rather than a bonus. Instead of using this resource to cut penal income taxes, McGrath has parked €4bn tax revenues in a new National Surplus Reserve Fund. Without this move, year to date at the end of August the Exchequer would have been €3.7bn in surplus.
Paschal Donohoe, McGrath’s predecessor, tinkered at the edges with business incentive schemes and reliefs such as EIIS, KEEP, and the R&D Tax Credit. However, the verdict from the Irish Tax Institute (ITI) is stark. “These vital supports are still not working as intended. The complexity involved in the administration of SME measures demonstrates a singular lack of understanding of the pressures business founders face in the ongoing management of their business,” the Institute stated recently.
High on the agenda for business lobby groups are the following reforms.
EMPLOYMENT INVESTMENT INCENTIVE SCHEME
Business owners tell the ITI that the administration involved in availing of the EIIS is “extraordinarily onerous and timeconsuming”. The organisation suggests that a streamlined process that uses non-mandatory template forms could make the process easier.
The EIIS does not allow capital losses to be offset and only allows investors to exit by way of a share redemption or a trade sale. In addition, connected party rules curtail investment by non-executive directors and staff.
The ITI also notes that administrative errors or delays in the reporting process can result in a full clawback of EIIS relief on the fundraising company. “Penal sanctions like this are disproportionate and make the risk involved for small companies not worth the trouble and expense,” the ITI complains.
R&D TAX CREDIT
The ITI’s view is that the current ‘one-size-fits-all’ approach is not working. Small companies do not have the experience or the capacity to document their costs and processes to the same standard as larger companies. The ITI suggests a preapproval process by Revenue for first-time R&D tax credit claims by small and micro companies to reduce uncertainty and the risk of an expensive Revenue audit.
Lobby group ISME calculates that 71% of the cost of the R&D tax credit is accounted for by large businesses, despite the fact that they make up 0.2% of active enterprises. The Commission on Taxation and Welfare recommended that there should be acceleration of the refundable element of the R&D tax credit from three years to one in order to support early-stage and R&D intensive businesses.
KEY EMPLOYEE ENGAGEMENT PROGRAMME
The ITI’s view is that linking the amount of share options that can be awarded under KEEP to the employee’s annual salary deprives start-ups the opportunity to attract talent.
ISME observes: “A euro of wages or bonus will always be just a euro. But a euro of equity trades at a multiple of that. Our tax system is depriving workers of the ability to create wealth for themselves and the Irish economy.”
ENTREPRENEUR RELIEFS
Despite years of pleading, Start-Up Relief for Entrepreneurs (SURE), the income tax refund for those who start their own business, is restricted to former PAYE workers. “It is difficult to fathom why new business founders who were previously self-employed should not be able to benefit from this refund,” says the ITI.
With Entrepreneur Relief, the relief requirement that an investor must spend at least 50% of their time over three years working for the company effectively rules out angel or venture capital investors. Such investors are not interested in fulfilling the onerous working time requirement, the ITI argues. “At a time when start-ups are having difficulty raising funds, it makes no sense to lock out external investors who provide invaluable advice as well as finance to business founders.”
CAPITAL GAINS TAX
Ireland’s CGT headline rate of 33% is the third highest in Europe and has remained unchanged since it was increased during the financial crisis. The ITI believes a 25% rate would encourage more mobility in business ownership. ISME concurs, arguing that behavioural economics are at play. ISME considers that a 25% CGT rate would stimulate a considerable increase in yield, not least because more zoned land would be sold.
SELF-EMPLOYED SURCHARGE
The coalition’s Programme for Government states that the 3% USC surcharge which applies to self-employed income over €100,000 is unfair. The Irish Tax Institute wants the surcharge scrapped, though ISME has a more pragmatic solution, “as it is now apparent that this discriminatory levy will not be ended”.
ISME wants minister McGrath to slap a 3% USC surcharge on himself and all PAYE workers earning over €100,000 per annum too, in order to even out things.
VAT
When the 9% VAT rate was originally introduced, the standard rate was hiked from 21% to 23%. While the Department of Finance viewed the 9% rate as an anomaly introduced in the Great Recession, the 23% VAT rate has remained, even though Ireland had a standard rate of VAT of 21% from 1991 to 2012. With core inflation still elevated, and a driver of wage demands, ISME has urged McGrath to look at ways to push down consumer prices, not drive them up.