The Irish economy continues to forge ahead. However, with the shadow of Brexit looming large, the minister commendably took a balanced approach to make an express show of support for Irish business in what was a largely conservative and restrictive Budget.
The proposed enhancements to the Key Employee Engagement Programme (KEEP) scheme, described in the Business Tax section, are to be welcomed. In the recent KPMG Entrepreneurs Barometer of 200 companies throughout Ireland, number three on the wish-list of Budget initiatives for entrepreneurs was a share incentive scheme tailored for SMEs. The Budget measures should go some way towards meeting this need.
Nonetheless, the 21% of entrepreneurs surveyed who wished to see capital gains tax (CGT) reform in the Budget will be disappointed that there were no enhancements to Entrepreneur Relief. Under the relief, entrepreneurs pay a special CGT rate of 10% when they dispose of qualifying business assets. The full rate of 33% then applies to gains above the lifetime limit of €1 million.
In a pre-Budget submission, KPMG made a number of detailed proposals for enhancing and expanding Entrepreneur Relief. We believe an enhanced relief would act as a genuine stimulus for indigenous Irish businesses. Unfortunately, the cautious fiscal approach of the Budget does not currently allow for such measures. There may be cause for hope, with the minister noting that his Department is to consider the outcome of the recent external review of Entrepreneur Relief by Indecon. Encouragingly, some of the recommendations from Indecon’s evaluation of Entrepreneur Relief align with KPMG’s pre-Budget submission.
To begin with, the lifetime gains limit should be increased from €1 million. By capping the limit at €1 million and imposing a 33% rate on the gains above this limit, Ireland is at a competitive disadvantage to many countries across Europe. Significantly, the UK offers a rate of 10% for the first £10 million of gains. Not alone would increasing the lifetime cap allow Ireland to compete internationally, it would also reduce the attractiveness for Irish entrepreneurs to set up businesses overseas. It is positive to see that Indecon’s recommendations include increasing the lifetime cap to €12 million for entrepreneurs who re-invest in a new business.
The relief is currently limited to gains on the sale of business assets. However, we would like to see the relief extended to dividends paid to entrepreneurs from qualifying companies. In Ireland, dividends are taxed at combined income tax and social security rates of up to 55%. Crucially, allowing entrepreneurs to extract dividends from their business at a 10% rate would be a huge boost for business owners and reduce the incentive for entrepreneurs to sell their businesses too soon.
The conditions under the current CGT regime 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 needed within the company. Owners should be allowed to benefit from CGT treatment for “phased” transfers of their business to the next generation. Again, it is heartening to see the Indecon recommendation that the CGT Entrepreneur and Retirement Reliefs be reviewed together as part of a next phase of formulating reforms. We look forward to positive developments in this area in Budget 2021.