Monday 26 September 2016

Enterprise Ireland chairman hits out at tax on stock options

Europe's biggest venture capitalist says 'crazy' tax holds back start-up founders

Published 28/06/2015 | 02:30

O'Rourke said the 33pc capital gains tax rate is an important issue for entrepreneurs given that the UK has a 10pc rate for people who are sole traders who sell their business
O'Rourke said the 33pc capital gains tax rate is an important issue for entrepreneurs given that the UK has a 10pc rate for people who are sole traders who sell their business

Ireland's tax structure is holding back entrepreneurs, Enterprise Ireland chairman Terence O'Rourke has told the Sunday Independent.

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The Enterprise Ireland chairman criticised the relative lack of a welfare safety net for entrepreneurs, the 33pc rate of capital gains tax, and "crazy" tax treatment of share options awarded to employees. Enterprise Ireland calls itself Europe's largest seed investor by number of investments.

O'Rourke joins the likes of top Irish venture capitalists Elaine Coughlan and John Flynn in calling for reform.

"Talking to companies, we want them to be more ambitious, to grow and to invest more. And one of the things that certainly holds them back, I think, is the tax structure," O'Rourke said.

"Obviously the corporation tax is very good, that's 12.5pc. That's excellent, that's a good start. But to pay 12.5pc corporation tax you have to make money, and people starting up don't have that.

"So the issues about the social welfare safety net and the issue about making the schemes for start-up capital and tax-efficient capital, they need to be better. They've been tweaked a little bit, they need to be tweaked more."

Self-employed people are not entitled to Jobseeker's Benefit if they become unemployed, but may be entitled to Jobseeker's Allowance depending on their means.

O'Rourke said the 33pc capital gains tax rate is an important issue for entrepreneurs given that the UK has a 10pc rate for people who are sole traders who sell their business.

He said it's important for people to be able to raise "safety money".

"It's the early stuff: you sweat your guts out to make a return - and then if you do make the return, there's a big tax take out of that. That's your safety money if you want to get your house and your kids done.

"If you can do more than that, great, and you can pay your capital gains tax on that.

"So I think there's definitely grounds for saying that the Government should continue to take a look at this. I know tax equity is important, but for people who are taking the risks - putting the sweat equity in - I think they need incentives to help them do that."

He said the taxation of share options is "a crazy situation". Employees are liable to pay income tax, USC and PRSI on share options within 30 days of the options being exercised.

However, exercising the options means the employee only has the money on paper - they won't get money unless they sell the shares.

The liability is calculated on the difference between the exercise price and the market value of the shares at the date of exercise. Capital gains accrued between the exercise of the options and the sale of shares is also liable for capital gains tax.

"I came across a guy a few years ago - I don't know if it's the current tax regime or not - but he made a lot of money on paper on share options, had a big tax charge, and had no cash. And he actually had to remortgage his house... and move in with his parents to pay the tax charge.

"The more critical thing in share options is when people are trying to incentivise their employees, to say: 'Listen, stick with us. We can't pay you very much because we're growing, but we will be giving you shares in the company if it goes well.'

"It's not a tax efficient structure if you compare with other countries, the Irish structure is one that requires cash payments at an earlier stage when there isn't cash available from the value of the shares. There are smarter ways of doing that than what we have at the moment, so that needs to change for sure."

The Government is conducting a public consultation to see how the tax system could better reward entrepreneurs.

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