Monday 5 December 2016

Deja vu for entrepreneurs on Michael Noonan's big day

Irish business people were left disappointed by the Budget

Published 16/10/2016 | 02:30

Ministers Michael Noonan and Paschal Donohoe meet the press Pic: RollingNews.ie
Ministers Michael Noonan and Paschal Donohoe meet the press Pic: RollingNews.ie

It all feels a bit like Groundhog Day. Another Budget has come and gone, and Irish entrepreneurs are left disappointed. Britain is a far more competitive place to start a business - it certainly needs to be post-Brexit - and industry players here have long-highlighted where Ireland falls short.

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Much of the negative attention has focused on Ireland's high rate of capital gains tax (CGT) - 33pc. In the last budget the rate was reduced to 20pc for entrepreneurs on lifetime gains up to €1m, and this year it was cut to 10pc with the ceiling remaining unchanged.

In the UK, entrepreneurs pay the 10pc up to a lifetime ceiling of £10m. Finance Minister Michael Noonan has committed to reviewing the ceiling in future budgets.

Brian Caulfield, perhaps the country's best known venture capitalist, says he's seen Irish companies moving to the UK to start up. He's not impressed with Noonan's offering.

"It's tokenism. The bottom line is that an entrepreneur selling a business in Ireland with any kind of half decent gain is still going to pay more than three times the tax they would pay in the UK," Caulfield, managing partner at recently floated venture capital (VC) firm told the Sunday Independent.

"There are maybe two fundamental problems, the first thing is there is no strategy for start-ups. There's a strategy for foreign direct investment, there's a strategy for agriculture, there is no strategy for start-ups.

"And the second problem is nobody cares. Unfortunately because there isn't a strong unified lobby for the start-up community, it's always bottom of the queue in spite of the fact that it's a crucial engine of job creation for the economy.

Patsy Carney is the chief executive and co-founder of Waterford-based Eirgen Pharma. He sold his business to New York Stock Exchange-listed Opko for $135m in one of the most high-profile Irish company sales in 2015. Carney told the Sunday Independent that Noonan's CGT tinkering was a step in the right direction but that further momentum was needed.

"It's going in the right direction. The reduction to 10pc, that's the attractive part. But in terms of the quantum involved being 1m, we're still quite a distance away from our neighbours in terms of the incentive for reinvestment.

"Because that's what we need to be looking at. If entrepreneurs have been successful and want to realise the gains, take them and reinvest in something else - which is what most of us do - to have 30pc of it disappearing straight away is not much of an incentive. If there was more of an incentive there so we could invest more of the funding, that would make a lot more sense."

The Tax Strategy Group put the cost of mirroring the UK scheme at €65m a year on top of the existing cost of the entrepreneurial relief. It says "there is no clear evidence on the marginal impact of tax relief on entrepreneurial activity". In other words, could we be sure we'd make the €65m back?

Noonan also announced a plan for "a new, SME-focused, share-based incentive scheme, to be introduced in Budget 2018".

"Such an incentive will require the approval of the European Commission and my officials will commence engagement with the Commission to ensure that the incentive will comply with State Aid rules in advance of the next Budget," he told the Dail.

The tax treatment of share options has long been criticised. The current system sees an income tax liability come due within 30 days of the date when share options are exercised (turned into shares), even though they may not have been turned into cash and there may not be a liquid market for them. Capital gains tax at a rate of 33pc then applies on disposal.

The Department of Jobs has advocated an SME scheme that would see no income tax on the grant or exercise of share options and the application of a favourable capital gains tax (CGT) rate on disposal of the shares - now it looks like it might get its way in part.

However, Caulfield says the share option element was "probably the most disappointing thing" in the Budget.

"This is not a new problem, this is something that's been known for years and I can tell you that it's at a level now, especially because of acquirers becoming more sophisticated in their approach to retaining staff, where it's killing deals and making deals incredibly difficult to do."

"So it was really disappointing to see it kicked to touch. And while I recognise that a radically improved scheme might require EU Commission approval, the reality is that there are a raft of very simple changes structurally that could have been made that have no cost implication whatsoever and would not require EU Commission approval. The really huge one that's causing enormous problems is that a tax liability can crystallise before a gain has been made at all.

"I'm aware of scenarios recently where people that maybe notionally made a €100,000 gain might have got a quarter of that up front, with no certainty of getting the balance, and together with their €25,000 they get a €52,000 tax bill. It's completely untenable.

"It's making it extremely difficult to get staff across the line in deals because they're looking at this and saying: 'Hang on a minute, you've been telling me for years that my share options are worth something, and now you're telling me that I'm going to have to find €27,000 to fund a tax bill - and I won't have a single penny in my pocket?'

"The idea that that change requires Commission approval is rubbish. It's just a fudge, a kick to touch."

Carney says the Government should be "a bit more imaginative and innovative in terms of how we look at these things".

"In the start-up stage of any company, anything you could offer around share options that's actually tax effective, that's welcome. Because we are competing for talent, that's one big issue when you're a start-up or an early-stage company. You need the talent, particularly in the economic environment we're in now and particularly in our industry."

Tune in next year to see if the song remains the same.

Sunday Indo Business

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