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Capital Taxes and report of Commission on Taxation and Welfare revisited

Tom Maguire discusses Capital Gains reforms and the Commission on Taxation in his latest Business Post column

The Minister for Finance, Michael McGrath was the keynote speaker at the recent seminar on the Report of the Commission on Taxation and Welfare which was hosted by the Institute of Taxation (ITI). I’ve previously referred to that Commission as “COT2.0” in these pages given that it is the second such Commission this century.

The Minister addressed many issues and reiterated his welcome comment that he had made previously at the ITI’s annual dinner regarding enterprise taxation. He said that “we have significant number of tax measures to encourage investment in our economy and in particular our indigenous SMEs. Schemes such as the EIIS, KEEP, the R&D tax credit and CGT Entrepreneurial Relief are all very important measures in this respect” and that he was committed to taking a fresh look at “all the enterprise tax measures on the table”. Regular readers of this column will know that I’ve made suggestions for some of these areas in the past.

The Department of Enterprise, Trade and Employment’s “White Paper on Enterprise 2022 – 2030” made a similar point when it noted that “Our Capital Gains Tax (CGT) regime for those investing in unquoted enterprises will be reviewed, including consideration of the need to reflect the risk premium involved versus investment in other assets. This will make an important contribution to ensuring our entrepreneurship and angel investment landscape is competitive”.

On enterprise taxation, which includes CGT, the Minister said that “the Commission had a very detailed and valuable chapter on Promoting Enterprise and many of these measures are touched upon. It is critical that we have a strong, viable and creative indigenous enterprise sector. We know that multinationals play a huge role both in terms of employment and tax receipts. But we cannot be complacent, and we cannot assume that this will continue. It is for that reason that we need to constantly assess our tax system to ensure that it is competitive both for multinationals and more importantly in my view indigenous SMEs”. So what follows are some additional suggestions.

I’ve previously written that our “normal” CGT rate is high compared to other countries and that it should be lowered but we know there may be political opposition to such an approach. That said, we know that when the rate of CGT dropped from 40% to 20% the yield from that tax increased dramatically. So if a permanent reduction in the rate is not possible, why not consider a temporary reduction for a particular period to allow for disposals of certain assets? Not to be morbid, but there's no CGT on death so one taxpayer option would be to hoard assets and let them pass to the next generation. That would allow any gain to potentially fall within Capital Acquisitions Tax (a whole different ball game) making it the next generation's problem. If a permanent reduction in CGT’s rate isn’t possible then why not go with the temporary option to crystallise the gain now rather than have the Exchequer wait. Jam today is better than jam tomorrow.

The Minister referenced the importance of CGT Entrepreneurial Relief which allows for a reduced rate in certain circumstances. Gains on disposals of “chargeable business assets” made by individuals are liable to a reduced CGT rate of 10% up to an overall lifetime limit of €1m otherwise the standard rate of CGT (currently 33%) applies to gains made.

As you can imagine various and detailed T’s and C’s apply. For example, those “chargeable business assets” include a holding of not less than 5% of the ordinary shares in the qualifying business (which is itself defined). Further, the asset must be held by an individual who is director or employee of the qualifying company (or qualifying group) in a managerial or technical capacity with not less than 50% of their working time in the service of the qualifying company. There are others but you get the gist.

Consideration could be given to increasing the “lifetime limit” of €1m as an incentive for an entrepreneur to remain in place and scale the business. Consideration should also be given to extending the relief to investors beyond the narrow list above. Cash is the lifeblood of business and therefore financing from additional quarters should be looked at. Indeed, the COT2.0 as part of its report on promoting enterprise, recommended that Entrepreneur Relief be extended to angel investors, subject to appropriate limits and conditionality.

The Minister also referenced EIIS above. I’ve written about that as part of these pages previously. If you invest in an EIIS company and it succeeds, then you pay Capital Gains Tax on any gain arising when you sell the shares, just as you would on any other investment. So, in Ireland there’s no discrimination between investors when a gain arises. However, when an investor makes a loss on disposing of their investment in EIIS shares, then that loss may not be an allowable loss for CGT purposes.

Had that investor put his or her money or savings into a non-EIIS company and lost money on that investment, then they would be allowed to use that loss in reducing other capital gains in the same or future years. Exiting an investment is just as much a consideration when considering whether to make such an investment in the first instance. Ensuring loss relief on EIIS investments would serve to reduce, but not eliminate, the element of risk when investing in such companies and by definition, increase such investments’ attraction to would-be investors.

We are in pre-budget mode which is the time of the possible. Myron Scholes (Nobel prizewinning economist) and others once wrote “Success is achieved when the tax rules subsidise activities that benefit society as a whole more than they benefit the individuals engaging in the activities…”. So let’s make the change.

This column is dedicated to the memory of Thomas “Tommie” Malone, my uncle, my mentor, my friend.

Please note this article first featured in the Business Post on Sunday, 2 April 2023 and was re-published kindly with their permission on our website.

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