Budget 2022 took the approach of giving a little morsel to everyone, rather than blowing a chunk of cash on innovative new ideas.
But now is the time to make a few bold bets. Unfortunately for Ireland Inc, our 12.5pc tax rate is now gone – the consequences of which are far from clear.
Having supported indigenous firms through the pandemic, what is needed now is decisive measures to back Irish business.
During all the years of foreign direct investment (FDI) job announcements, some quieter voices were reminding policy makers of the role indigenous firms play in creating employment and their contribution to the Irish economy.
However, Budget 2022 tinkered around the edges of Irish business supports – such as improvements to the Employment Incentive and Investment Scheme (EIIS) – rather than taking risks which could deliver on the upside.
The Government continues to stubbornly ignore perennial calls for changes to its Capital Gains Tax (CGT) policy.
Calls for a new rate of CGT for investors and entrepreneurs have been one the most consistent features of business groups and tax adviser pre-budget submissions for many years.
At the moment, entrepreneurs’ relief allows a 10pc rate of CGT on gains on disposals up to a lifetime limit of €1m, provided a number of criteria has been met. This provides for a maximum tax saving of €230,000. After that a flat rate of 33pc is applied.
It has been suggested that the current regime encourages passive investors to invest in large blue-chip multinationals rather than in higher risk Irish start-ups.
It has also been suggested that the way the scheme operates holds back our indigenous entrepreneurial ecosystem.
Ahead of last week’s Budget, PwC argued that succession planning and planning for future exit strategies are central to the survival of many SMEs.
“Targeted and timely measures to facilitate the orderly transition of ownership of businesses within the SME sector could ultimately be the difference between their success and failure,” said the firm. A favourable CGT regime would play a key role here.
Ibec said that the Government could “send a signal of intent to serial entrepreneurs by radically improving the CGT entrepreneurs’ relief”.
“This can be achieved in a balanced way by removing the lifetime limit on gains, matching the rate with future corporate tax rate and expanding the relief to passive investors in areas with high growth potential”.
And the accountant’s umbrella group CCAB-I argued that a lower CGT regime could oil the M&A machine.
“There is merit now in considering if a lower rate of CGT and CAT (capital acquisitions tax) could drive a surge in business and personal transactions to bring much needed funds into the Exchequer. Businesses and individuals would view a headline rate of 25pc as a more acceptable level of taxation on gains and on transfers between family members compared to a loss of a third of a gain to taxation as is currently the case.”
Another argument is that as a lower CGT would prompt more transactions, the Exchequer would not lose out.
Department of Finance officials have long had reservations about reducing the rate. They saw red lights some years ago when the UK’s bill for CGT significantly exceeded estimates.
In the most recent Tax Strategy Group papers, in which top officials thrash out the implications of potential tax measures, it is noted that while Ireland is often dubbed uncompetitive in terms of its CGT rate, there is a move towards higher CGT rates in other parts of the world.
Almost a year ago, the UK’s Office of Tax Simplification, a statutory body, published a report into CGT that concluded current rules were “counter-intuitive” and created “odd incentives”.
However, the Financial Times reported at the time that the rules were likely to stay untouched for now for fear of unsettling Tory voters.
In any case, Ireland’s Tax Strategy Group concluded there was no compelling case for making a significant reduction at the current time.
However, the Government would not have to make a long-term commitment to a new rate. One option is to introduce a lower rate for a set period, such as two or three years, and judge the impact. The Commission on Taxation and Welfare which will look at ensuring Ireland is attraction to entrepreneurs, among other things, is also likely to give CGT some attention in the coming months. It may be tricky to get right but perhaps now is the time to take a chance on a measure businesses so clearly desire.