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What is clear and indeed very welcome is that SMEs are very much centre stage in many areas of the Programme for Government, writes Alan Bromell, Tax Partner with KPMG.

So there is a lot of detail in the Programme for Government with references to SMEs throughout. This piece focuses on the main themes or measures that stood out to us, as well as some suggestions for specific measures that could help reboot the Irish indigenous sector. 

1. Backbone

The critical role which SMEs have always played in the economy and will play in the recovery and growth is a central theme throughout. SMEs are referred to more than once as the “backbone” of our economy and as key drivers of employment.

The terms indigenous company and SME are used interchangeably in the programme and there is a wide acknowledgement of the critical role played by Irish companies regardless of their size.  We think it’s very important the measures put in place to promote a return to a “new” normality and growth in the indigenous sector are available to a wide cohort of Irish companies, and that companies are not excluded by virtue of failing to meet certain indicators which are overly narrow. 

2. Jobs

The programme majors on a ‘jobs led’ recovery. The aim is to create 200,000 new jobs by 2025, as well as helping people currently employed due to COVID-19 get back to work. This will require a concerted focus on SMEs, large companies and the self-employed.

As part of a proposed July Jobs Initiative there will be a number of immediate actions taken which will be of relevance to SMEs including clarifying the future of the Temporary Wage Subsidy, legislating for the warehousing of COVID-19 tax liabilities, and a number of Government funding initiatives aimed at SMEs. The more clarity that can be given on the warehousing of tax liabilities at the earliest opportunity the better, in particular for companies which do not automatically qualify for the programme as they fail the very low bar for what constitutes an SME, being a company with less than €3m in turnover. 

3. National Economic Plan

In conjunction with Budget 2021 the Government will bring forward a National Economic Plan to set out the long-term approach to restore employment, restore public finances and driving efforts to decarbonise the economy and prepare for the next phase of technological transformation.

A common theme in the document is the fact that we must now take the impetus to deal with decarbonisation and technology not only for the good of society, but also to generate economic opportunity. Investor appetite for green investment has already emerged, with some investors now excluding investments that do not meet relevant criteria as a matter of policy. It’s important that SMEs are part of that journey and aren’t left behind and the narrative in the programme is positive in that context. 

4. A tax system which is supportive of the SME sector

There is a commitment to review the tax environment for SMEs and entrepreneurs, with a view to introducing improvements to different schemes, so that Ireland remains an attractive place to sustain and grow an existing business or to start and scale up a new business. 

Employment Investment Incentive (“EII”)

While not specifically mentioned one such scheme is EII, which is an existing income tax relief for investors in certain companies. In our recent submission to the Department of Finance we had a number of suggestions to improve EII which would go towards the broad strategy mentioned in the programme, for example extending EII to founders and their connected parties and increasing the annual investment limit.

As a more general point, a lot of the funding supports referenced in the programme involve direct Government funding. Any money spent by the Government that is borrowed will ultimately have to be paid back.  In our view, the private sector can and must also play an important role. Not only will this ease the pressure on public finances now, but it will also reduce the need to raise taxes or reduce Government spending in other areas in the medium to longer term.

Capital Gains Tax (“CGT”) rates

There is a commitment to review CGT rates in each Budget over the next 5 years in particular with the objective of supporting innovation driven enterprises that will help us transition to a low carbon economy.

Our rates increased from 20% to 33% between 2008 and 2012 and have not been eased since. We have seen this act as a disincentive to the establishment, development and sale of businesses in Ireland, in particular when compared with a more favourable UK regime in that period. We should now take advantage of this impetus to ensure our entrepreneurs base themselves and stay here.

For example, as an incentive to release private capital and savings to investment in the recovery, we have suggested that Entrepreneur Relief be expanded to passive investors in areas where investment capital is needed in order to avail of high potential growth opportunities in projects established within an accelerator hub environment. 

Income Tax rates

Thankfully, there is a commitment not to increase income tax or USC ratesthis is to be welcomed given our marginal rates of tax are very high to begin with. Any attempt to raise funds through income tax measures would be counterproductive as it would disincentivise employment and entrepreneurial activity. It would also make Ireland less competitive in attracting Foreign Direct Investment and there is a key counter dependency there from an SME perspective.

Proposals will be considered to address the imbalance between the “all in” effective tax rate of self employed individuals (55%) as compared with the 52% rate paid by other high earners arising from the 3% USC surcharge for the self employed. This is long overdue. 

Establish a Commission on Welfare and Taxation

Amongst the number of committees to be established under the Programme is a Commission on Welfare and Taxation which would independently consider how best the tax system can support economic activity, whilst ensuring we are raising sufficient public funds, but having regard to ageing demographics, the move to a low carbon economy and the rise of automation. That is a lot to swallow and balancing those competing interests is an unenviable task – but it is right to set this ambitious target.

The last report of a Commission on Taxation was in 2009 and it is interesting that although it was 11 years ago, there was a very similar mandate. There were 240 non-binding recommendations to Government, many of which were very interesting and should be dusted off. Alas not many of the positive recommendations were implemented. Hopefully with the benefit of hindsight and the right political will, things will be different this time. 

5. Foreign Direct Investment (“FDI”)

We see it that thriving Irish indigenous business and a thriving FDI community go hand in hand, if we are to reach the ambitious targets in the programme. There are various commitments to ensuring we remain competitive in attracting FDI (including the ever-present reference to maintaining and defending our 12.5% corporate tax rate).

FDI is of prime importance to the indigenous sector and the sectors are inextricably linked with multinationals making up many SMEs primary customers and multinationals dependent on indigenous companies to supply them with goods and service ranging from ranging to industrial goods and traditional services to “IP rich” services in the technology and pharmaceutical sectors. 

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