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SMALL FIRMS ASSOCIATION
PRE-BUDGET 2017
SUBMISSION
Presented to:
MINISTER FOR FINANCE, Michael Noonan, T.D.
MINISTER FOR PUBLIC EXPENDITURE AND REFORM,
Paschal Donohoe, T.D.
MINISTER FOR JOBS, ENTERPRISE AND INNOVATION, Mary Mitchell O’Connor, T.D.
1
Table of Contents
EXECUTIVE SUMMARY ............................................................................................................. 2
INTRODUCTION .......................................................................................................................... 3
CONTEXT .................................................................................................................................... 3
TAXATION ................................................................................................................................... 4
Taxation of entrepreneurs and the self-employed ................................................................... 4
Ensuring work is rewarded ....................................................................................................... 5
PRSI ......................................................................................................................................... 6
Rewarding risk takers ............................................................................................................... 7
Other tax heads ...................................................................................................................... 10
Labour market issues ............................................................................................................. 11
EXPENDITURE .......................................................................................................................... 12
Capital expenditure ................................................................................................................ 12
CONCLUSION ........................................................................................................................... 13
2
1. EXECUTIVE SUMMARY
Competitiveness must be at the heart of Budget 2017. The reality is that Ireland
remains a high cost location with numerous barriers and disincentives for
entrepreneurs and established businesses. The SFA calls on the Government to place
the same importance on competitiveness over the coming years as they placed on
macro-economic stability in the period following the financial crisis.
Taxation
Following the recent vote in the UK to leave the EU, the need to improve the Irish tax
offering for indigenous business has never been more urgent.
Priority recommendations:
End discrimination against the self employed in the tax system to encourage
entrepreneurship:
o Abolish the 3% USC surcharge that applies to the self-employed
o Increase the EITC to the same level as the PAYE tax credit
o Introduce a voluntary PRSI system for the self-employed
Reward work by increasing the entry point to the marginal rate of tax and
decreasing the rate by 1%.
Review employer PRSI to fulfil the commitment that the National Minimum
Wage increase on 1 January 2016 would not penalise employers.
Reduce the CGT rate to 20%, with a 10% entrepreneurial relief up to a lifetime
limit of €15 million, to stimulate investment.
Introduce a scheme similar to the UK’s Enterprise Management Initiative for
employee share options in small firms.
Expenditure
Ireland’s poor recent record of capital investment, coupled with its evolving
demographics, is leading to bottlenecks in transport, education, broadband, water,
health and other public infrastructure. Capital expenditure must reach 4% of GDP as
soon as possible. The Government should seek flexibility in the EU fiscal rules in order
to exempt this investment spending.
Priority areas for investment:
Improving broadband infrastructure, particularly in rural areas
Developing public transport links
Building a real motorway network
Addressing housing shortages
Enhancing education and in-work training
3
2. INTRODUCTION
The Small Firms Association (SFA) is the trusted partner of small businesses in
Ireland, with 8,500 members and four affiliated organisations in all sectors and parts of
the country. Its mission is to deliver business-focused advice and insights to member
companies, influence government policy to the benefit of small businesses and
connect its members in a thriving community.
The SFA has a vision of Ireland as the most vibrant small business community in the
world – supporting entrepreneurship, valuing small business and rewarding risk
takers. Currently this vision is aspirational and significant policy reforms will be
required to make it a reality. The SFA welcomes the opportunity to submit our views
on Budget 2017 based on our experience, insights and knowledge of the small
business community, which comprises over 200,000 businesses, employing half of the
private sector workforce.
3. CONTEXT
Competitiveness must be at the heart of Budget 2017. This Budget comes at a time
when the tailwinds that have propelled the Irish recovery over the past number of
years are waning. Ireland has benefited from low oil prices, exchange rates and
interest rates, but these are all factors outside of our own control and liable to change.
We must not let them distract us from the underlying issues. Instead, the focus must
be on building solid, long-lasting foundations for business to thrive. Increasing global
economic instability in the aftermath of the Brexit vote and rising domestic business
costs create a very different context for Budget 2017 compared with Budget 2016. It is
also critical to recall that while for many the fragility of the crisis years has passed, the
recovery has not been consistent regionally or sectorally. Many small businesses are
still waiting to feel the upturn.
The SFA calls on the Government to place the same importance on competitiveness
over the coming years as they placed on macro-economic stability in the period
following the financial crisis. The attractiveness of the Irish business environment
internationally determines the standard of living across the country, but the reality is
that Ireland remains a high cost location with numerous barriers and disincentives for
entrepreneurs and established businesses. This submission contains proposals for
how the Government can improve the business environment and support investment
and jobs through changes in the tax regime and taking a strategic approach to
expenditure in Budget 2017.
4
4. TAXATION
The tax system has a vital role to play in supporting development at each stage of the
life cycle of a small business. It must constantly evolve to ensure that Ireland remains
an attractive place to establish and scale a business.
Following the recent vote in the UK to leave the EU, the need to improve the Irish tax
offering for indigenous business has never been more urgent. The upcoming budget
must support those industries for which the immediate fall-out from Brexit is greatest,
including small firms. Helping these sectors maintain a competitive edge will be an
important factor in overcoming the challenges that Brexit will pose.
The tax system today has very mixed signals for business. The elements that
represent disincentives to establish a business, take up employment or invest must be
addressed, as outlined below. Tax reform is key to unlocking job creation, investment
and growth and it forms an important dimension of making the Irish business
environment attractive relative to the UK.
4.1 TAXATION OF ENTREPRENEURS AND THE SELF-EMPLOYED
Budget 2016 contained some positive changes from a small business perspective. In
particular, the introduction of a modest income tax credit for the self-employed was
recognition of the discrimination that this group faces in the tax system, as the SFA
has long highlighted. The remaining discriminatory elements must be dismantled as a
matter of urgency.
In the SFA’s Summer 2016 Small Business Survey, reducing taxation on the self-
employed was identified as the most important change the Government could make to
boost small business. We welcome the commitment in the Programme for
Government to “provide a supportive tax regime for entrepreneurs and the self-
employed”. To make this a reality, it is critical that there is at least equity in treatment
between employees and proprietary directors/self-employed people in the tax system
and that business owners are afforded an equal level of protection as their employees
in the event of business failure or illness.
- USC surcharge
The 3% surcharge on USC, which applies only to the self-employed, should be
expired (as promised at the end of 2014). This surcharge is out of line with the aim of
encouraging entrepreneurship and scaling up of new businesses and sends a
confusing message to the self-employed about the Government’s support for them.
Cost: The SFA estimates that the abolition of the surcharge would cost €60 million.
- Income tax credit
5
The introduction of a small Earned Income Tax Credit (EITC) in Budget 2016 was an
important gesture to entrepreneurs and the risk-takers in the economy. However, the
shortfall of the EITC relative to the PAYE tax credit means their effective income tax
rates are still higher than those of PAYE workers with the same gross income.
The SFA advocates an increase in the EITC to €1,650 for the self-employed and
proprietary directors to match the PAYE tax credit.
Cost: It is estimated that this would cost in the region of €120 million in a full year.
4.2 ENSURING WORK IS REWARDED
As the Programme for Government highlights, “high personal tax rates in Ireland
discourage work and jobs”. The current level of taxation has resulted in the erosion of
domestic spending power, a reduction in the incentive to work and an increase in
wage pressures, which currently represents one of the biggest threats to Ireland’s
competitive position.
International evidence which shows tax systems with a broad base and low marginal
rates provide the best outcomes for employers, employees and the economy. The
SFA welcomes the acceptance by the Government that the income tax burden is now
too high and has identified a number of policy changes throughout this document that
would help to ease this burden.
- Marginal tax rate
We require a tax system that rewards work but, despite the changes in recent
budgets, Ireland has one of the highest marginal tax rates in the OECD. Conditions
around the marginal tax rate are crucial – it is the main avenue through which income
taxation affects economic growth due to its impact on the incentive to work and take
on extra work, and on the attractiveness of Ireland as a destination for talent.
While Ireland has one of the highest marginal tax rates in Europe, what is particularly
damaging is that this rate kicks in at a level which is much lower than in any other
European country, even below the average wage. This, coupled with the high marginal
rate (49.5%) significantly reduces the benefit of working additional hours or receiving a
pay increase. In fact, half of all workers face losing 49.5% out of every €1 they get in a
pay rise. This especially impacts second earners whose labour market decisions are
much more sensitive to tax and benefit changes.
The SFA calls for the entry point to the marginal rate of income tax to be increased by
€1,500 for a single person with a corresponding increase for married couples and
other tax cases. Personal tax credits should be increased by €100 for all income
earners.
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Cost: These two measures combined are estimated to cost €338 million.
In addition, the SFA strongly advocates a 1% reduction in the marginal rate of income
tax.
Cost: This would cost approximately €158 million.
- Social welfare reform
SFA members continue to report examples of the social welfare system working at
odds with getting people into employment and increasing their hours of work.
Evidence points to a number of social welfare traps, as households become less able
to meet their needs when they move from unemployment to part time hours and part
time to full time hours. The withdrawal conditions for social welfare payments, such as
the one parent family payment, must be examined as part of a root and branch review
of the social welfare system.
Furthermore, the SFA calls on Government to introduce improved structures to
incentivise social welfare recipients to take up part time work. Part time work has been
shown to be a stepping stone to full time employment across Europe. However, the
Irish social welfare system disincentivises jobseekers from taking up part time work.
This situation could easily be rectified in one of a number of ways, for example by
calculating social welfare on an hourly basis rather than on a daily basis; by allowing
part time workers to work a certain number of hours per week before they lose their
entitlements; or by allowing the hours worked and social welfare to be taxed as a
whole in line with the current tax system. Another solution would be that people who
work part-time are allowed to add up their working hours in a week and only have
Jobseeker’s Allowance cut when they reach the equivalent of a full day’s work.
4.3 PRSI
A number of facets of the PRSI system also require review to ensure that they are
aligned with the aim of increasing Ireland’s competitiveness and making it an attractive
place to live, invest and establish a business.
- Voluntary PRSI for the self-employed
Owner-managers feel aggrieved that, despite contributing to PRSI, the self-employed
have no safety net in case of illness or business closure. The commitment in the
Programme for Government to “introduce a PRSI scheme for the self-employed” is
welcome, but it is critical that this is established as a voluntary scheme. A mandatory
scheme would be viewed cynically as an opportunity to impose additional taxes on
small business. Instead, the self-employed and proprietary directors should have the
7
option to pay a modest PRSI top-up in order to qualify for social welfare benefits
similar to their employees.
- PRSI and the National Minimum Wage
Budget 2016 introduced certain PRSI changes, effectively ending the step effect from
an employee perspective and shifting the step effect for employers. However, the
changes to employer PRSI cannot be considered an ‘appropriate adjustment’ in the
context of the new minimum wage of €9.15, as called for by the Low Pay Commission
in conjunction with their recommendation on the rate increase. The changes offset
less than 10% of the increased labour costs as a result of the NMW increase. The
minimal level of the offset has resulted in even greater pressure on companies in
labour intensive, low margin sectors, who have very limited scope to either absorb the
cost increases or pass them on to customers. Therefore the poor alignment of the
minimum wage and the tax system has increased the likelihood of the minimum wage
increase costing jobs.
The Government must fulfil its commitment that the NMW will not be anti-employer.
These PRSI anomalies must be addressed in full in Budget 2017 to offset the NMW
increase in January 2016 and any additional increase granted for 2017.
- PRSI for new businesses
To encourage job creation the SFA proposes to phase in employer’s PRSI for new
businesses, so that they pay reduced rates of employer PRSI on staff they recruit in
their first three years – for example 25% for staff recruited in year 1, 50% for staff
recruited in year 2, 75% for staff recruited in year 3 and then the full rate on later
recruitment. This would incentivise earlier hiring.
4.4 REWARDING RISK TAKERS
Being an attractive location for investment is a necessity if Ireland is to improve its
underlying competitiveness. This includes not only being a destination for Foreign
Direct Investment but also an attractive country in which to sell assets or invest in a
small company, either through equity or employee share options.
- CGT rate
CGT is a key determinant of investment in the economy, which is a critical driver of
growth. Ireland has one of the highest rates of CGT amongst developed economies
at 33%. This puts Ireland at a competitive disadvantage when it comes to attracting
and retaining mobile investment. By comparison, the UK rate is either 18% or 28%
depending on the size of income and capital gains.
8
The SFA is calling for a reduction in CGT to 20% across the board, to make investing
in a business in Ireland more attractive, in particular relative to competitor countries.
History has shown that a lower rate of CGT substantially boosts the overall tax take,
so the Exchequer will benefit from such a move.
Furthermore, a special 10% rate for disposal of sites that have been granted planning
permission should be introduced on a temporary basis for a three-year period. This
would encourage the sale of sites that current owners are not in a position to develop
and, as such, contribute to increased supply of housing.
- CGT entrepreneurial relief
Some improvements were made to the CGT entrepreneur’s relief in Budget 2016 with
the scheme being reformed and simplified.
The SFA welcomes the commitment in the Programme for Government to further
reduce the entrepreneurial rate to 10%. The statement that this will apply to new start-
ups from 2017, however, casts doubt over the fair and equal application of the
measure. Established businesses should not be treated less favourably than new
businesses, not least as this would significantly delay the impact of the initiative.
Furthermore, we believe that Budget 2017 should see Ireland improve its offering
significantly when compared with the UK by increasing the lifetime limit for the 10%
entrepreneurial rate from €1 million to €15 million.
Cost: The cost would be in the region of €52 million in 2017.
- Employee share options
Changes to the system of taxation for share based remuneration in recent years have
reduced the attractiveness of such schemes to businesses. Addressing this issue will
assist small and new firms to attract talented, experienced staff. It has the potential to
improve skills in small business particularly management capacity, which is a
persistent cause of business failure. It would also improve staff retention and
productivity in small and new firms, in particular at senior levels, by providing a long
term incentive and increasing employee buy-in.
Uptake of Revenue-approved schemes is low in small firms. These schemes should
be more flexible, in particular to allow share options to be granted in accordance with
individual/team productivity and performance. The SFA also proposes that the
€12,700 limit be reviewed. The employee PRSI and USC liabilities, which were
introduced in 2011, should be removed, as this has decreased the uptake of these
schemes.
The tax treatment of non-Revenue approved schemes must be overhauled in order to
create a workable and attractive system for both employees and companies. The
practice of taxing unrealised gains at the marginal rate of income tax must be ended.
9
The SFA proposes that the rate is reduced to the ordinary rate and that payment is
spread over five years.
A scheme similar to the UK’s Enterprise Management Incentive (EMI) is needed for
new and small firms in Ireland. The SFA proposes that this scheme would waive the
income tax due on the gain between the granting and exercising of the option for
employees within start-up and small firms. Instead they would only be taxed on the
capital gain when disposing of the shares.
Cost: The total 2017 cost for all of the measures outlined above would be in the region
of €80 million.
- Employment and Investment Incentive Scheme (EIIS)
Currently, the EIIS does not function as intended and requires a rethink. An enhanced
EIIS would encourage more friends, family and experienced local entrepreneurs to
invest in small firms in Ireland. It has the potential to give small businesses financial
leeway to allow business balance sheets to recover and to address the equity gap left
by banks. Our specific recommendations are outlined below.
Change the scheme rules:
o Return to a five-year investment term so that the businesses have the
necessary time to grow sufficiently to be capable of repaying the
investors.
o Remove employment and R&D criteria – these complicate the scheme
unnecessarily. By definition if the business grows these will occur, but it
poses unnecessary risk to the investor up front.
o Evaluate the cost-benefits of extending the scheme to other specific
sectors.
o Exempt the gain from CGT if it is held for seven years (similar to
property reliefs already in place).
o Examine UK and international models with a view to implementing
Government risk-sharing models with private investors in similar
schemes. This would be important to attract non-traditional EIIS type
investors, and specifically other small business owners who might be
interested in investing in other businesses.
Return to BES as the scheme name, as this is more recognisable.
Enhance publicity around the availability of the scheme. The only media
reporting about the scheme tends to be negative, focusing on the tax write-
offs, as opposed to recognising the importance of facilitating equity investment
10
in what are viewed as relatively high risk domestic small businesses. In
particular, it is important to promote the family and friends and private
placement options, as well as funds option, and make it easy for companies to
use the scheme without having to pay for expensive professional advice.
4.5 OTHER TAX HEADS
- VAT
The special 9% VAT rate for hospitality and related sectors has been a resounding
success and has provided important support to regional employment. We believe that
the economic rationale for the scheme has not changed and, in fact, support for the
sector is needed more than ever in light of the Brexit vote and its exchange rate effect.
The 9% VAT rate should be retained and made a permanent feature of the tax
system.
Furthermore, there should be no increases in other VAT rates or excise duties in order
to avoid jeopardising domestic consumption.
Shortages of housing units, especially in urban areas, are causing problems
throughout the economy, distorting the cost of living and making Ireland a less
attractive destination for FDI and mobile talent. Initiatives to encourage an increase in
the supply of residential property should be brought forward in Budget 2017. A
reduced VAT of 9% should be applied to the construction of residential property for
two years to relieve the supply shortages without further increasing house prices. A
0% VAT rate should be applied to the construction of social housing.
- Corporation tax
The SFA supports the retention of the first three years’ corporation tax exemption for
tax liabilities under €40,000. Very few start-ups get to avail of the full €40,000
exemption but it is a valuable support, allowing new companies to retain profits.
Many small companies struggle with the pre-payment of corporation tax. The SFA
proposes introducing retrospective payment for small firms and the option to pay in
instalments throughout the year.
- R&D tax credit
Smaller firms and start-ups in particular face funding constraints for R&D investments.
Despite this, the R&D tax credit’s take-up among smaller companies has been weak.
Only 1% of companies with turnover less than €1 million use the tax credit each year,
compared with 12.5% above that mark.
11
In many cases, owner-managers who engage in R&D discover following tax
assessments by external Revenue-appointed experts that they do not qualify for tax
credits. They need certainty up front about what will and will not qualify for tax credit
purposes, particularly in micro-enterprises, where owner-managers are likely to be
engaging in R&D themselves. This will greatly incentivise such companies who are
wary of expenditure on R&D in the absence of the tax credit.
The SFA believes that it is necessary to create a specific, tailored R&D tax credit
scheme for small firms to encourage more R&D spend – an ‘R&D Tax Credit Lite’.
Such a scheme should reduce the existing complexity by using pro-forma templates
for R&D project management, recording of R&D activity and calculations of costs and
revenue benefit. Simple on-line calculators should be developed to increase usability
for small firms and targeted promotion of the scheme should be rolled out.
Cost: The introduction of an ‘R&D Tax Credit Lite’ along the lines outlined would cost
approximately €5 million.
4.6 LABOUR MARKET ISSUES
Irish labour costs are the tenth highest in Europe and 20% above the EU average.
Irish small firms are at a competitive disadvantage relative to firms in the UK across a
number of major business costs and total labour costs are 17% higher in Ireland than
in the UK. This is a particular problem for small firms in the services sector where the
cost of employing an individual accounts for between 72% and 86% of location
sensitive business costs (i.e. costs which vary by location rather than being set by a
worldwide market).
The National Competitiveness Council has warned against complacency in relation to
competitiveness and SFA members have highlighted wage inflation as the biggest
threat to their business in the coming year. In light of this feedback and with 7.8% of
the workforce still unemployed, it is crucial that the Government does nothing to put
additional pressure on labour costs in Budget 2017.
It is imperative for the competitive position of Ireland that wage levels are decided in
a competitive labour market. Wages should not be determined by an artificial legal
instrument such as the minimum wage. Any wage increases must be linked to
improved productivity and the profitability of the business.
12
5. EXPENDITURE
5.1 CAPITAL EXPENDITURE
Ireland’s investment spend is currently among the lowest in the EU even though
Ireland has the region’s fastest growing population. In recent cutbacks, capital
expenditure was the first thing to go, leading to a decade of underinvestment. Capital
expenditure currently averages 2.2% of GDP per annum, the vast majority of which is
spent on maintenance and repair as opposed to growing the country’s social and
economic capacity.
This poor record of capital investment, coupled with Ireland’s evolving demographics,
is leading to bottlenecks in transport, education, broadband, water, health and other
public infrastructure. This economic model is not sustainable if Ireland is to maintain
its economic performance, and it is certainly not a recipe for improved
competitiveness. As was stated at the outset of this submission, it is time to place as
much impetus behind the competitiveness agenda as was behind macro-economic
stability during the term of the previous government.
On this basis, the Government must take a more ambitious approach to capital
investment, going beyond the additional €5 billion foreseen in the Programme for
Government. Capital expenditure must reach 4% of GDP as soon as possible. The
Government should seek flexibility in the EU fiscal rules in order to exempt this
investment spending.
In terms of capital expenditure, the Small Firms Association has identified clear priority
items that would improve the business environment, ensure that businesses and
citizens around the country benefit from the overall economic recovery and assist with
the attraction of Foreign Direct Investment and talent.
The SFA capital expenditure priorities are:
Improving broadband infrastructure, particularly in rural areas: The SFA
welcomes the commitment in the Programme for Government that further
funding will be made available if necessary in order to deliver the National
Broadband Plan. It is imperative that no further delays to its rollout are
permitted.
Developing public transport links: Additional Investment is needed in public
transport, in particular transport links between Dublin Airport and the city
centre.
Building a real motorway network: It is vital to continue to develop road
connections throughout the country, in particular to ‘join up’ regional cities. This
would allow increasing volumes of passenger and freight traffic to move quickly
around the country and improve access to services such as regional hospitals
and educational institutions.
13
Addressing housing shortages: The current crisis in housing supply is
impacting the whole of the Irish economy and society. Provision should be
made to fast-track planning and procurement for key projects, in particular for
sites with capacity for more than 100 units where all related services are in
place. This measure, in conjunction with the CGT and VAT measures outlined
in previous sections would encourage and speed up much-needed supply.
Enhancing education and in-work training: Ireland performs poorly in terms of
lifelong learning and research shows that investment in management capacity
could reduce business failure by half. In light of falling unemployment, the
National Training Fund should be re-oriented to focus on in-work training, in
particular through Skillnets and specifically its ManagementWorks programme
targeting small business.
6. CONCLUSION
Budget 2017 will chart a course at a time when Ireland’s economic future could follow
a number of trajectories. Recent economic performance has been strong and small
businesses generally view the current economic environment positively. However,
business costs are rising, many of the fundamental policy challenges facing the
country have not been addressed and the international environment in which Ireland
operates is uncertain, in particular in light of the UK’s decision to leave the EU.
Small business can lead the way in helping Ireland to continue to broaden and deepen
its recovery – but in order to do this, the Government must create the right conditions
by putting in place an enabling tax environment, curbing the cost of doing business (in
particular labour costs) and delivering world class physical and digital infrastructure.
More than anything, Budget 2017 must deliver competitiveness improvements to allow
small business to put its best foot forward, domestically and internationally.
For further information, please contact Linda Barry, SFA Assistant Director, on tel:
01-6051626 / 087-1472811 or e-mail: [email protected]. More information about the
SFA is available at www.sfa.ie or on Twitter @SFA_Irl.