The Tax Strategy Group looks at the taxation of Entrepreneurs

The Tax Strategy Group’s (TSG) Budget 2024 papers were published recently on the Department of Finance’s website with the clarification that “The TSG is not a decision-making body and the papers produced by the Department are simply a list of options and issues to be considered in the Budgetary process”. The TSG is in place since the early 1990’s and is chaired by the Department of Finance with membership comprising senior officials and political advisers from a number of Civil Service Departments and Offices. The published papers cover everything from Income tax to climate change.

There was one paper that specifically caught my eye being the one on Enterprise Supports. The first line of the introduction says it all “Small and medium enterprises (SMEs) are the foundation of the Irish economy, accounting for the majority of employment in the State”. As we know cash is the lifeblood of business and the paper covers such matters as the Key Employee Engagement Programme a form of share option scheme with the paper noting that based on 2022 returns made to Revenue 70 companies have established KEEP schemes since it commenced in 2018. So, take up there has been low notwithstanding its purpose is to allow Cash strapped “David” companies to compete with their Goliath competitors.

The TSG notes “A related additional recommendation of the [Commission of Taxation and Welfare] in relation to share schemes in general that the Department is also considering is to limit the blanket exemption from employer PRSI on share-based remuneration. A review of this matter will form part of a wider consultation on all share-based remuneration which is proposed to be commenced this year.” So maybe that means that this may not be a Budget 2024 issue, but it could serve to increase the costs to employers on this issue, so on that basis it’s good to talk.

On a similar note, the paper looks at Employment Investment Incentive Scheme (EIIS) which has, according to the TSG as one of its main objectives being “To support the creation and retention of employment in SMEs across the economy, the consequences of which include a positive impact on Exchequer cash-flows, such as increased provision of payroll taxes and corporation tax, as well as savings on social protection payments”. That said, we all know this is a complex relief and the TSG point to the EU General Block Exemption Regulation (GBER). It notes that EIIS currently come within under Article 21 of GBER.

The paper explains that the European Commission has recently endorsed a targeted amendment to the GBER with a view to further facilitating, simplifying and speeding up support for the EU's green and digital transitions. It continues that “while consideration of the implications of the GBER revisions is ongoing, some amendments necessitated by the revisions will likely significantly impact the operation of the reliefs – with some elements of the schemes having to be more restrictive”.

In terms of both KEEP and EIIS the key is to alleviate difficulties for business i.e. staff retention and getting cash into a business. Both are complex. Revenue guidance on the EIIS weighs in at over 100 pages. As I have in these pages on these reliefs that simplicity eats complexity for breakfast. KEEP can save cash and EIIS can make cash, so I’d urge any changes to these reliefs be, as far as possible, simplifying in nature and bringing about additional ease of access.

Staying with saving cash, the TSG paper also looks at Entrepreneur relief from a Capital Gains Tax (CGT) perspective. This provides for a reduced CGT rate of 10 percent (normally 33 percent) on gains arising from the disposal of qualifying business assets. There are a number of Ts and Cs for the relief including a lifetime limit of €1 million on the gains that you can claim relief on.

The TSG notes that the objective of the relief is to support and encourage entrepreneurial activity. But according to the TSG, “it can be argued that the fact that the criteria for benefiting from the relief are relatively simple means that it is not necessarily targeted at entrepreneurs. The relief can benefit businesses that were in operation before the relief was introduced and reinvestment of the proceeds of a sale is not a requirement of the relief”.

I mention this because (a) cash is the lifeblood of business and (b) the TSG note that the Department of Finance is now carrying out a further targeted review of the relief with the support of the Department of Enterprise, Trade and Employment and Enterprise Ireland. It explains this review includes a targeted survey of individuals and practitioners and will be published at the time of Budget 2023 and the outcome of the review will be used to inform recommendations to the Minister in advance of the budget.

In my view, making the relief more attractive is something that should be part of this review such that business can have access to cash so that it can thrive. This gives rise to additional tax receipts in the form of income, corporate and payroll taxes. Therefore, consideration should be given to increasing the lifetime limit as well as extending the relief to additional investors. Here the key is focussing on putting money into business.

On the more general matter of CGT, the separate paper on Capital Taxes explains that a 5% reduction in the CGT rate in a single Budget would have an Exchequer impact of €340 million, “assuming no behavioural change”. In the words of John Maynard Keynes “When the facts change, I change my mind, what do you do, sir” and we know our rate is high by international comparisons. History would dictate that when the rate went down the yield went up. So why not bring about a little bit of history repeating.

Overall, getting cash into business, should be made as simple as possible, but no simpler.

Please note this article first featured in the Business Post on Sunday, 6 August 2023 and was re-published kindly with their permission on our website.