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Budget 2020 - The Entrepreneur Relief

Making the Entrepreneur Relief more entrepreneurial

Budget 2020 - The Entrepreneur Relief

By their very nature, Irish entrepreneurs are optimistic and positive. They want to create jobs, expand their footprint and scale their business.

However, if you want to really draw their ire, just mention three simple letters: C-G-T. Ireland’s capital gains tax (CGT) regime has long been the bête noire of Irish business, with the headline rate of 33 per cent viewed as a disincentive to entrepreneurship and investment.

The Entrepreneur Relief was the government’s response to that criticism. Unveiled in 2013 and reformed once again in 2015, the relief is designed to encourage serial entrepreneurs to establish new companies and invest in Ireland.

By utilising the relief, entrepreneurs pay a special CGT rate of 10 per cent when they sell a business or an asset - up to a lifetime gains limit of €1 million. The full rate then applies to gains above that figure.

While undoubtedly a step in the right direction, it is now clear that the relief does not go far enough to achieve its stated aims.

In the recent KPMG Entrepreneurs Barometer of 200 companies, more than a third of all those surveyed identified either reform of the CGT regime or the Entrepreneur Relief as their most preferred initiative in the upcoming Budget. 

In our pre-Budget submission, KPMG recently made a number of detailed proposals for enhancing and expanding the Entrepreneur Relief. We believe an enhanced relief would act as a genuine stimulus for indigenous Irish businesses, particularly family firms. 

So, what needs to happen?

To begin with, the lifetime gains limit should be increased from €1 million to €10 million. By capping the limit at €1 million and imposing a 33 per cent rate on the rest of the gains, Ireland is at a competitive disadvantage to many countries across Europe. 

Significantly, increasing the lifetime limit to €10 million would bring the Irish offering more in line with what is on offer in Britain, which offers a rate of 10 per cent for the first £10 million gains.

Based on our review of international tax codes, this UK relief is the lowest tax rate (by a significant margin) amongst a range of comparator countries which tax capital gains.

With Brexit looming and Britain talking about further reliefs, it is important that Ireland acts now to reduce the gap between the Irish and British offering.

Increasing the threshold is the easiest way to do this.  

Not alone would the change allow Ireland to compete internationally, it would also reduce the attractiveness for Irish entrepreneurs to set up businesses overseas.

DIVIDEND INCOME

There are other areas where Ireland can box clever. The relief is currently limited to gains on the sale of business assets. However, it would make sense to extend the relief to dividends paid to entrepreneurs from qualifying companies.

Crucially, it would reduce the incentive for entrepreneurs to sell their businesses too soon. Allowing entrepreneurs to extract dividends from their business tax efficiently reduces the attractiveness of an early sale.

This will encourage entrepreneurs to continue to invest and expand their business and would release capital for them to invest in other businesses.

In Ireland, dividends are taxed at progressive rates of income tax, USC and are liable to Pay Related Social Insurance (PRSI). This leads to combined taxes of between 52 per cent and 55 per cent.

Extending the relief to dividends would radically reduce the cost of taking money from the business and would be a massive boost for business owners.

We do not believe that this will cost tax revenues. Rather, we consider that it supports a desired behavioural change -- growing and scaling business in Ireland, as opposed to potentially selling to a foreign buyer at an early stage.

The current rules incentivise business owners to sell out too early to avail of the current €1 million lifetime threshold. This should change.

KPMG's Olivia Lynch

FAMILY FIRMS

Family businesses are the backbone of the Irish economy, so the Entrepreneur Relief should reflect that. The conditions for capital gains tax under the current regime are quite blunt and encourage entrepreneurs to make a one-off transfer to the next generation or to sell – even if the next generation are not ready to take over or the original founder is still required within the company.

Owners should be allowed to benefit from capital gains tax treatment for “phased” transfers of their business to the next generation which are funded from the business.

Extending the relief to dividend income would particularly benefit family business, as it would allow a way of getting a return on capital for the family. This should allow funding for retirement by the older generation given much of their wealth is tied up in the business itself whilst freeing up the next generation of entrepreneurs to put their stamp on the business.

Our proposals would also provide greater flexibility for family owners to choose the form in which they realise profit from the business in order to give the best fit for the business and their personal financial position. 

INDIGENOUS BUSINESS

By tweaking the Entrepreneur Relief, the government can really aid and assist indigenous Irish business.

It would particularly benefit the founders of businesses with high growth potential, owners of family businesses, as well as highly mobile individuals with entrepreneurial skills and capital. If these changes were made, it would reduce the rate of tax on profits - whether capital gains or dividends - realised by individual entrepreneurs.

This would increase the attractiveness for setting up a business and creating employment in Ireland.

This article first appeared in the Sunday Business Post and has been reproduced here with their kind permission.