2 days ago
Overly bureaucratic policies to encourage entrepreneurship need to be reviewed
US president Trump's tariffs merry-go-round continues to dominate global headlines. Firms are weary of the oscillation between 'tariffs-on' and 'tariffs-off' — but this pattern shows no sign of abating.
It's a truism at this stage, but uncertainty has become the new normal.
Understandably, there is concern among Irish policymakers, and indeed the general public, as to what the new economic dispensation will mean for Ireland's FDI-led economic model.
FDI companies operating in Ireland deeply value their presence here and the contribution this has made to their business.
Many companies have invested heavily in Ireland and dismantling investment of this nature and locating it somewhere else is not easily done, even if firms were minded to do so.
And though we don't detect any appetite of this nature in the market there is an issue, however, in relation to further growth of Ireland's stock of FDI in future.
The continuing uncertainty is having an impact on firms' investment decisions as they look to incorporate a 'wait-and-see' approach.
In this context, it is important to look at Ireland's capability to continue to deliver economic and employment growth in a (still hypothetical) world where the level of FDI is lower than it has been.
The health and prosperity of our homegrown businesses will be vitally important in this scenario.
Ireland has a track record of generating world-beating businesses, but the reality is the current policy environment is not calibrated to achieve our full potential in this area.
Successive governments have sought to introduce various policies to foster more entrepreneurship.
Adjustments are made year-to-year across budgets, but the day-to-day reality has been that the design of some of these schemes is not suitable to achieve the desired ends.
Tax practitioners like myself and my colleagues are seeing this on a regular basis as we seek to help clients utilise these schemes.
KEEP scheme
Take the KEEP scheme for example. This is designed to enable companies to grant share options to employees on a tax-efficient basis, essentially so the share is taxed within the capital gains bracket rather than the income tax bracket.
Granting share options to employees is a good way of supplementing their remuneration in an environment where large firms with deep pockets are competing for the same talent.
The issue with KEEP, unfortunately, is it is not working in practice; take-up is extremely low.
What we see in our practice is that firms will tend to opt for so-called 'unapproved' share schemes rather than KEEP, even though the unapproved schemes are taxed more heavily from the perspective of the employee.
Why are they doing this? The biggest reason we can see is the limit that attaches to the total value of share options that can be issued to an individual employee (€300,000).
There is also a limit of €6m on the total amount of share options that can be issued (across all employees) and unexercised at any point in time.
These limits restrict firms' ability to offer really competitive packages across their companies.
Instead, they are opting for unapproved schemes that mean employees can be offered a higher value of share options, albeit in a less tax-efficient manner.
The UK equivalent of KEEP, which has much less red tape attached, works much better, and the Government should look to draw lessons from it.
Angel investor scheme
On March 1, the Government commenced the new angel investor relief scheme which aims to incentivise investment in startups by reducing capital gains tax to 16%-18% on the sale by angel investors of these investments.
It is early days, but we are not optimistic for take-up.
Again, there is a lot of administration work involved for the small firms that are the targeted beneficiaries.
They need to hold two certificates, showing they are an innovative company that is a going concern, and obtaining these involves an application process which many companies would need to undertake.
In addition, investment by family members, a common source of funding for early-stage companies, has restrictions attached.
Taken together, we believe these will serve as a significant brake on uptake of this scheme.
A relaxation of the restrictions on family members and a self-declaration process allowing firms to obtain the qualifying certificates would be preferable.
Another way to increase take-up would be to allow the relief to apply where investment is directed towards follow-on or expansion funding, rather than simply angel investment.
The above are two examples of how Ireland's policy regime could be enhanced to encourage more entrepreneurship.
There are others, including changes to the oft-criticised entrepreneur's relief scheme.
We know we have a fantastic, knowledgeable, skilled and talented workforce. We are lucky to have it.
But at a time like now, when the outlook for growth in FDI is hazy, it's important that we consider how to drive homegrown businesses forward.
In this regard, a wholesale government review of policies towards entrepreneurship is warranted.
Brendan Murphy is a tax partner at Baker Tilly Ireland
