Whilst the Irish tax system has been very successful in supporting the overall economy through the encouragement of Foreign Direct Investment, it requires improvement to better support Irish owned businesses.
With the challenges and uncertainty of Brexit looming over many Irish businesses and in a continually evolving international tax landscape, it is now more important than ever that there is a vibrant and expanding “home grown” Irish business environment.
Through our consultations with members of the DCU National Centre for Family Business and the Family Business Network, we have identified a number of straightforward and inexpensive changes to support Irish businesses in creating jobs, retaining key talent, raising investment and helping inter-generational succession.
Supporting job creation and talent retention
The introduction of the tax efficient share option scheme for SMEs known as “KEEP” was welcomed when it was announced in 2017.
However, for a variety of reasons, KEEP is not proving successful and, based on the information that is available, it appears that only 38 individuals have been granted KEEP options to date.
For example, KEEP does not work for businesses with more complex group structures (which are common), nor does it work for part time employees which is out of step with flexible modern work practices and arguably disproportionately affects working mothers.
Share buybacks generally impose income tax on participating individuals (thus ruling out KEEP). However, in the family business world, there are often no external purchasers for KEEP shares and a share buy back is the only exit mechanism available.
We would argue that Capital Gains Tax (CGT) treatment should be available in these instances to preserve the availability of KEEP relief.
Similarly, KEEP is not available where the strict valuation thresholds are breached however, there has been no guidance and/or “safe harbour” rules released to provide employers with clarity on share valuations.
The 3% levy on self-employed income (which was introduced during times of austerity), should be abolished with immediate effect. It is hard to see any justification for retaining this levy on a class of tax payers who create jobs and invest in our economy.
Enhancing greater investment in Irish businesses
Employment and Investment Incentive (EII, formerly known as BES relief) and Start-up Capital Incentive (SCI) reliefs are designed to support investment in Irish companies. However both could be improved to have a more positive impact on our economy.
The limits available for relief under EII should be increased so that it competes with the more generous EIS in the UK (e.g. UK £1 million per annum compared to Irish €150,000). Furthermore, the relief itself should be granted in the year of investment, rather than the current system where it is phased over a four year period.
We are also seeking greater clarity around the availability of Put and Call Option arrangements which provide for a timely exist of investors on commercial grounds.
SCI relief was introduced to allow parents invest into their children’s companies and gain tax relief, however there is a legislative anomaly which can actually disqualify tax relief in this instance. This is most likely inadvertent and we are suggesting an amendment to rectify this.
Supporting successful succession
Whilst current tax policy encourages the transfer of family businesses to the next generation through the use of specific tax reliefs, there are certain limitations, anomalies and age limits associated with the current reliefs which may lead to higher than expected tax costs.
The presence of investment assets in companies (as many businesses will hold to some extent) currently has a disproportionately negative impact on the value which can qualify for the CGT Retirement Relief. This anomaly should be rectified such that it is consistent with other reliefs in the legislation (e.g. Business Relief).
Tax policy encourages early stage transition through the imposition of a €3 million cap on CGT Retirement Relief when someone turns 66. In our view this is impractical and ageist as people are capable of running businesses well beyond 66 years of age and are not always in a position to decide by that time who should take over the business. We feel the cap should be abolished.
Also the €1 million threshold for Entrepreneurs’ Relief capital gains at the reduced rate of 10% should be increased in line with the UK equivalent (which has a £10 million cap).
Gift/Inheritance tax relief known as “Business Relief” only covers 90% of the value of the business, which can still leave significant tax liabilities for the recipients. This should be increased to 100% putting us on par with the UK.
Changes to the Irish Tax Appeals System to enhance business certainty
It is important that the self assessment tax regime is fair, equitable and works in tandem with an efficient appeals process allowing taxpayers to contest situations where they believe their tax assessment is not reflective of the actual facts and circumstances.
The Tax Appeals Commissioner (TAC) is currently under pressure to deal with the increased volume of appeals being submitted and a large backlog of cases has arisen.
This, coupled with high rates of interest being charged, is creating uncertainty for taxpayers and is acting as a deterrent to taxpayers bringing tax appeals.
A ‘Small Claims’ division should be introduced to provide for more timely (and cheaper) processing of smaller tax appeal cases. Furthermore, to promote fairness and equality, an independent Tax Ombudsman should be introduced for independent oversight.
More simply, the 10% annual rate of interest charged should be reduced in line with our UK counterparts (who apply a rate of 3.25%). Again, similar to the UK, a Certificate of Tax Deposit Scheme could be introduced allowing taxpayers to pay the contested amount of tax upfront, which can be repaid with interest if their case is successful.
Ronan Furlong is a tax partner at PwC entrepreneurial and private business practice.