We live in an era of great uncertainty and increasing risk. The opening words of Minister Donohoe’s speech spoke to the reality faced by many of our SMEs, the backbone of our domestic economy. Budget 2021 presented many measures to aid the survival of the SME sector and signposted that more measures are on the way to help those businesses survive and return to growth, writes Olivia Lynch, Tax Partner, KPMG in Ireland.
Minister Donohoe has thrown a liquidity lifeline to those areas of our economy among the most in need – accommodation, food, the arts, recreation, and entertainment.
The new Covid-19 Restrictions Support Scheme (CRSS) is primarily aimed at businesses in those sectors which are closed or effectively closed as a result of Level 3 or higher restrictions under the Government’s Plan for Living with Covid-19. These businesses can apply to Revenue for a cash payment based on 2019 average weekly turnover, subject to a maximum weekly payment of €5,000.
While this new scheme is undoubtedly welcome, one has to question does it go far enough? For many SMEs, the weekly payment under the scheme is likely to be far lower than €5,000 (less than €2,000 per week for a business with 2019 turnover of €1 million). To qualify at all, turnover must be down by at least 80 per cent compared to the corresponding 2019 period. There are countless businesses that don’t meet the test and yet are seriously struggling for their survival. The capacity constraints in place, even at Levels 1 and 2, are putting a severe strain on businesses. The weekly payments are not a grant – instead they are an advance credit for trading expenses – and will likely reduce future tax refunds that might otherwise arise from allowable losses.
Another welcome part of this package of measures, together with the commitment to continuing the Employment Wage Subsidy Scheme, is the reduction in the VAT rate for the hospitality and tourism sector from 13.5 per cent to 9 per cent with effect from 1st November 2020 and continuing for a 14-month period to 31 December 2021. This rate reduction presents various welcome opportunities for struggling businesses, not only to lower prices and stimulate demand as highlighted by the Department of Finance’s Tax Strategy Group (TSG), but also to subsidise costs.
To date, Revenue’s debt warehousing scheme has been ringfenced to VAT and Employer PAYE debts. Budget 2021 extends the scheme to income tax liabilities of self-employed taxpayers. The 2019 balance of tax and 2020 preliminary tax payments that would otherwise be due in December 2020 (under the Covid-19 extended ROS pay-and-file deadline) may now be deferred for a period of a year with no interest applying. The interest rate thereafter – normally a punitive 8 per cent per annum – will be 3 per cent. Again, a valuable targeted measure at a time when many self-employed individuals were growing increasingly concerned about their ability to fund their upcoming income tax liability.
Given that many workers are now working from home, Minister Donohoe’s clarification on the current tax rules in place regarding remote working was timely. For example, up to €3.20 a day may be paid to employees by employers towards to the expense of working from home without a Benefit-In-Kind arising, while workers may claim a tax deduction within Revenue guidelines for utility expenses such as heat and light – and, new for 2020 – this may now include the cost of broadband. Given that remote working provides an opportunity for many to maintain employment during the pandemic while at the same time limiting the amount of physical interactions to which workers and others are exposed, the commitment to developing a strategy to support remote working will be of interest to many. Further support in this area would appear to make sense from both an economic and public health perspective.
The future of lives and livelihoods were front of mind for the Minister in his speech and, while surviving was the firm focus, there were hints of longer-term plans to return to a thriving SME economy.
SMEs will need cash to grow and the relatively low demand for loans under the €2 billion Covid-19 guarantee scheme suggests caution about taking on debt in a risky and uncertain environment. Equity may hold more appeal and Budget 2021 signalled some positive developments to incentivise investment.
CGT Entrepreneur Relief rules have been eased under Budget 2021 so that the minimum ordinary shareholding requirement of 5 per cent can be met by reference to any continuous 3-year period at any time prior to disposal, rather than in the 5 years immediately prior to the disposal. Many entrepreneurs will now be in a position to raise further equity financing without fear of diluting their shareholding to less than the required 5 per cent.
The Employment and Investment Incentive (EII) Scheme may be enhanced in light of the current Covid-19 crisis following an assessment by the Department of Finance. It is worth remembering that efforts have already been made over many years to streamline the relief and increase its attractiveness to both investors and companies alike – with the scheme being entirely rewritten as recently as Finance Act 2018 – without a meaningful climb in uptake. We hope that any changes arising from the review are ambitious and seek to substantially enhance the scheme such that it will appeal to a broader range of potential participant businesses and investors at this crucial time. While we wait for the outcome, relaxing the recent restriction on family investment would be a welcome development.
Budget 2021 may mark a missed opportunity by the Government to tap into the significant savings that some taxpayers have accumulated through the crisis and encourage investment. The rumoured reduction in the main CGT rate from 33 per cent – among the highest in Europe – did not materialise. While it may be counterintuitive to reduce capital taxes rates at a time when many are struggling, such a move may well stimulate investment in Irish businesses and market liquidity across Irish assets. Take for example the reduction in the rate from 40 per cent to 20 per cent during 1995 – 2000. Instead of the CGT take being halved, it in fact increased more than twelve-fold in real terms over that period.
To grow and scale, SMEs need investors who not only bring cash, but also their networks and business acumen. The Minister was quick to point out that a 10 per cent CGT rate under Entrepreneur Relief is not for passive investors – but what about successful entrepreneurs operating several businesses at once, or angel investors whose contributions to investee business cannot be measured simply in hours spent? Value added by such investors should be rewarded.
The Minister announced a two-year extension of the Knowledge Development Box (KDB) regime, which provides for an effective 6.25 per cent rate of corporation tax on income arising from certain qualifying assets (e.g. computer programs, patent protected inventions, etc.). However, this regime has to date attracted very little interest from taxpayers, with September’s papers from the TSG highlighting 2018 claimants were in the single digits according to provisional figures. If the regime is to deliver on its potential as a measure to stimulate investment in innovation and R&D in Ireland, a broad review of the current rules to qualify for the relief will be necessary.
The extension of the accelerated capital allowances scheme for energy efficient equipment is to be welcomed, as are other green spending measures. Given that this Government is the greenest in our history – and buoyed by broad public support for such measures and buy in from Irish businesses keen to play their part – we hope that future budgets further encourage investment in green innovation.
Minister McGrath closed his speech with a JFK quote which paid tribute to the remarkable combination of hope, confidence, and imagination of the Irish. Budget 2021 may bring some hope and confidence to SMEs. As budgetary and fiscal policy moves from serving the needs of today to fuelling the recovery of tomorrow, let’s see that imagination shine through.
This article was first published in the Sunday Business Post and is reproduced here with their kind permission.