Tax measures a part of ‘whole of Government approach’ needed for Irish SMEs as 1,000 insolvencies expected in 2024

According to the latest available data published by CSO in 2024, SMEs (<250 persons employed) account for 99.8% of all enterprises and 7 in every 10 workers in Ireland are employed in SMEs. Two-fifths (41.5%) of total turnover and 34.8% of Gross Value Added (GVA) was attributed to these enterprises. In comparison, large enterprises (250+ persons employed) accounted for just 0.2% of all enterprises and 30.8% of persons employed. Across Europe, SMEs also form the backbone of the European economy. These companies comprise around 99.8% of all active businesses in Europe, while producing almost 52 percent of total value added in the EU. In 2023 SMEs in the European Union employed almost 85 million people. Such staggering figures nationally and across the EU perfectly demonstrates the vital role SMEs play on this island, acting as the “engine room” of the Irish and indeed global economy

In the last couple of years, SMEs were affected by pandemic-related measures which were then followed by difficulties in hiring new staff to meet an unexpectedly strong rebound in demand; geo-political tensions which disbalanced their supply chains; economic uncertainty and turmoil; inflation which provoked rises in interest rates, which in turn reduces access to finance; increased energy costs; increased raw material prices and the termination of the financial aid from governments. Nevertheless, their numbers remained strong. 

The vast majority of Irish SMEs (86%) still remain optimistic about the business environment in Ireland in 2024, demonstrating resilience, optimism and stamina. 

While the recent changes in the Budget 2024 related to SMEs (e.g., angel investors relief, changes to retirement relief, R&D, KEEP, EII and VAT thresholds); measures adopted by Revenue Commissioners on the warehoused debt and the establishment of a dedicated TALC were timely and welcomed, more tax policy measures must be identified and implemented as soon as possible in Ireland as 1,000 Irish SME insolvencies are expected by end of 2024. 

The following could be key tax measures to help our SMEs not only to stay afloat, but to grow and scale in Ireland:

• Reduction in the employer’s PRSI rate.
• Introduction of a further substantial income tax package (e.g., middle tax rate of 30%; an increase to the standard rate cut off point from €40,000 to €50,000); and a reduction in the higher rate of income tax) to attract and retain talent.
• Tax incentives and reliefs to support businesses in their digital transition and transformation
• Review the lifetime limit and nature of the Entrepreneur relief, as at the current rate there is little incentive for an entrepreneur to remain in place and scale the business.
• Extend the age limits for the Retirement relief and introduce a Stamp Duty relief on the transfer of commercial properties to encourage life transfers to the next generations.Provide for a lower rate (20%) of tax on dividends to entrepreneurs.
• Tax reliefs for SMEs to address climate challenges, carbon reduction to encourage green investments (e.g., Italy and Portugal already have specific tax incentives for ecological design improvements in manufacturing activities)
• Consider new long-term debt solutions to help businesses address the remaining warehoused debt.
• Further enhance KEEP and SARP reliefs to enable SMEs to attract and retain talent. 

However, tax measures in a vacuum may not deliver desired impact. Ireland must take a “whole of government approach” (e.g., infrastructure, housing, social welfare, education, regulations, financing and grants etc.) to encourage, retain and scale up SMEs, which will always remain a critical pillar of the Irish economy.

The OECD noted that “SMEs and entrepreneurship are central to Ireland’s challenge of generating broad-based growth and prosperity.” In Europe, the Commission identified improving the business environment for SMEs as one of the key priorities and recently adopted a series of initiatives to address SMEs needs in the current economic environment. The Irish Government recognised the importance of entrepreneurs and SMEs to the economy and committed in the Programme for Government to backing entrepreneurs and proenterprise initiatives. The SME and Entrepreneurship Growth Plan states that the “the importance of entrepreneurship to Irish society is well documented, not only in economic and employment terms but also in creating a resilient, innovative community that serves the Irish, EU and international markets.”

We should continue to invest in an ecosystem that encourages entrepreneurship, productivity, and employment within the Irish economy to ensure that we have more Irish-owned tax contributing SMEs producing high-value jobs and tax receipts, particularly given the Minister’s comments regarding potential windfall corporate tax receipts in the past. The Minister for Finance’s statement to take “a fresh look at all the enterprise tax measures on the table to assess whether they are working properly and fulfilling the potential that we know our economy can deliver” is welcome. The options are known, and now the focus should remain on their implementation. And while many larger businesses fully recovered from the recent shocks, fast and meaningful measures should benefit our SME environment. 

Please note this article first featured in the Finance Dublin and was re-published kindly with their permission on our website.