Though Ireland’s self-employed individuals make up over 11% of income earners according to the CSO, they are not treated the same way as PAYE workers when it comes to taxation.
These tax disadvantages are discouraging for entrepreneurs, especially when you consider they often tend to be serial entrepreneurs and reinvest if given the right support and incentives.
Our 2019 survey of the EY Entrepreneur of the Year Alumni Community provides some valuable insight into entrepreneurial behaviour:
• 81% of entrepreneurs have set up more than one business
• 51% have invested in other businesses
• 44% plan to invest in other businesses
• 88% believe that tax breaks to grow regional business would drive momentum.
Ireland’s economy remains vulnerable to risks such as a no-deal Brexit and global tax reform, which is only further reason for Government to support indigenous business owners.
There are five ways in which Ireland’s tax policy is particularly impacting entrepreneurial activity by taxing self-employed persons differently.
Additional 11% USC rate for self employed
The Universal Social Charge (USC) was introduced in 2011 in response to the economic downturn.
This was done to account for the shortfall in tax receipts from employment rates spiralling downwards and the lack of capital gains tax and stamp duty receipts, which fell off a cliff after 2007.
However, the self-employed paid a bigger price than anyone under the new USC regime and those earning more than €100,000 were hit with a supplemental rate of 11%.
This means that the top marginal rate of 55% was applied to self-employed workers while PAYE workers earning a similar amount pay 52%. It is not clear why the self-employed and employed have been taxed differently and why steps have not been made to address this in subsequent years.
According to the Revenue Ready Reckoner issued in August 2019, this affected 23,570 persons in 2019, which is significant and is certainly not conducive to fostering entrepreneurial activity.
Lower tax credits
The majority of PAYE workers can avail of tax credits, and single persons earning up to €18,000 will pay virtually no income tax because they have tax credits of €3,300 to offset against the income tax payable.
However, the same level of tax credits are not available to self-employed workers. For a
self-employed person the Earned Income Credit is only €1,350 as against the equivalent PAYE credit of €1,650.
Whilst this Earned Income Credit, which was introduced in 2015, went some way towards narrowing the gap, it still means that a self-employed person will pay more in income tax simply because they work for themselves.
Though the Minister for Finance has signposted prudence in Budget 2020 in light of the Brexit risks to our economy, this is an inequality in our tax system that needs to be addressed and at a cost of €70 million to the State, it is only right to do so.
Entrepreneurial relief is less than 10% of the corresponding relief in the UK
We have one of the highest rates of capital gains tax (CGT) amongst our western neighbours, at 33%.
CGT is paid on the profits that arise from the disposal of an asset. Of course, we are used to hearing that “the value of your investments can go up or down” and there is no guarantee of a profit when starting a business or making an investment.
This is a risk that all entrepreneurs and investors knowingly take, however, the rate of CGT in Ireland appears a very high price to pay on the risks associated with starting a business.
There is an incentive available for entrepreneurs called Entrepreneurial Relief, which reduces the rate of CGT to 10% on the first €1 million of profits made on the disposal of qualifying assets.
Whilst this is welcomed by taxpayers, in the UK, the equivalent relief is allowed on up to £10 million in profits.
We believe it is important that Irish taxpayers are put in the same position as our near neighbours to ensure that Irish entrepreneurs continue to invest in Irish businesses, and feel that the risk/reward quotient is not only fair in light of the risk of investing their own money in their business but also incentivises entrepreneurs to be serial entrepreneurs and reinvest in Irish businesses again and again with these profits.
This is not about putting more money in entrepreneurs’ pockets, it’s about encouraging them to start businesses more than once, therefore continuously contributing to
Ireland’s economy and creating jobs along the way.
For Irish entrepreneurs, especially those who own a private business, a common concern is how to get cash from the business in a tax efficient manner.
A divided being paid to an Irish taxpayer will accrue income tax and if the total earnings are more than €100,000, the dividend will also be liable to income tax, USC and PRSI of 55%. To the majority of taxpayers, this is a very high price to pay and can have the adverse effect of forcing the entrepreneur to sell the company instead, so that the tax
is paid at 33% (via CGT) instead of 55%.
This is counterproductive to our national economy where we seek to encourage Irish entrepreneurs to scale their business, create continued employment and contribute to the long-term prosperity of the nation by paying taxes to the Irish Exchequer.
We would recommend that dividends are also brought in under the Entrepreneurial Relief umbrella and also available for tax relief so that small business owners can realise value from their business without having to dispose of their business in order to make it economically viable.
Equity schemes for entrepreneurs
Cash strapped start-ups often struggle to recruit senior talent to provide the necessary skills and expertise to develop and grow a small to medium enterprise (SME). They seek to make their remuneration packages more attractive by offering equity in the business to potential recruits.
Unlike PLCs, the shares that are awarded may or may not produce a return in the future, so the tax system should not penalise these employees.
A share scheme called Key Employee Engagement Programme (KEEP) was introduced for employees of SMEs to incentivise these businesses to be able to offer equity to employees at a preferential tax rate.
Unfortunately, the scheme is currently very restrictive in terms of who qualifies and it was recently thought that only 50-60 people were within the KEEP system (the bulk of them were employed by two companies) and have availed of KEEP since its inception in 2018 so it is obviously not having the desired effect.
We are calling on the Minister for Finance to amend this in the Budget to make it easier for entrepreneurs to qualify for the relief.
Currently, it’s easy to see how one could be discouraged from beginning a business owner, let alone growing it to scale and becoming a significant employer.
It’s clear that there should be revisions to Irish tax policy to not only create a better environment for the self-employed, but to foster an ecosystem of entrepreneurship in Ireland and ultimately support the country’s ongoing economic growth, employment and prosperity.
Michael Rooney is a partner in people advisory services at EY Ireland