Thursday 18 October 2018

Can Donohoe's Budget save small firms from the Brexit 'cliff edge'?

The Finance Minister has delivered a steady budget but SMEs and self-employed were left wanting more

Minister for Finance Paschal Donohoe Picture by Fergal Phillips
Minister for Finance Paschal Donohoe Picture by Fergal Phillips

Gavin McLoughlin and Fearghal O'Connor

When Finance Minister Paschal Donohoe left the podium at the exclusive St Stephen's Green Club last Wednesday the reaction among the high-profile business people, economists and media types present was largely positive.

"He speaks like the CEO of a listed company," said one impressed businessman who had turned up for the early morning breakfast briefing to hear how Donohoe's first Budget will impact Irish business.

Businesses have largely been giving a cautious welcome to the Budget since Donohoe delivered a package that was uncontroversial and delivered no hostages to fortune.

As Donohoe spoke at length two days later to the assembled business people in St Stephen's Green, a well-timed Luas passed by on the newly-built tramline outside the window as if to underline economic progress, bringing a smile to the face of the former Transport Minister.

"A lot done, more to do," he might have quipped, if the slogan was not already taken.

But miles from the vibrant hustle and bustle of Dublin city centre, in the village of Finea, Co Westmeath, right on the border with Co Cavan, Bernard Coyle takes a somewhat more downbeat view of Donohoe's first budget.

Coyle's company, Mr Crumb, provides 100 jobs in the village in a modern food-processing plant that exports artisan bread crumb and stuffing products to the UK and Europe. Its brand can be found on the shelves of most of the major UK multiples and the business is the main employer in an area with very few alternatives.

For Mr Crumb, and many other similar small Irish food producers dependent on exporting to Britain, the threat of Brexit and the subsequent fall in sterling is placing a question mark over their very existence.

So where others may have been looking for a few euro extra in their pocket at the end of the month from the Budget, food producers such as Mr Crumb were looking for a lifeline.

"People over the years came to see budgets like Christmas and this is more of a balance-the-books type budget, which is probably as it should be," said Coyle. "But, that being said, for many of us in small companies, particularly in the food industry, it is something of a disappointment."

Perhaps, the standout announcement from the Budget for small business owners was the €300m Brexit loan scheme announced by Donohoe to help companies through the challenges ahead.

But, said Coyle, there was a distinct lack of detail as to how this will work in practice for prepared consumer food companies such as Mr Crumb, which operate on net single-digit margins and which send about 20pc of their total production to the UK - where they are now dealing with a 20pc drop in sterling.

"It seems like a very small sum of money to deal with the problems that lie ahead. There is little detail, for example, whether it will work through long-term low interest loans or, even better, whether it could be used to take preference shares in some of these companies.

"If they don't do something dramatic I have absolutely no doubt that a lot of companies in this sector will not survive the cliff edge that is approaching over the next 12 months."

Apart from the lack of detail around the Brexit loan scheme, Coyle believes the Budget has one very negative development for small exporting businesses, which, he said, were already 15pc less competitive than similar producers on the continent and in the UK.

"We have one of the highest minimum wage rates in Europe and that has just gone up again by 30 cent an hour.

"I understand this is an expensive country to live in but the government should be looking to reduce taxes for low paid people rather than increasing the minimum wage. If you keep pushing it up we just become even less competitive."

Coyle estimates that the latest increase will cost his company about €70,000 a year. "Where does the Government think that companies such as ours are going to magic up such sums of money?" he says.

"A lot of these companies are scattered around rural Ireland so the loss of jobs that is going to come inevitably, in my opinion, is going to be felt outside of the big cities in companies that employ five to 50 people."

Michael Carey, chairman of Bord Bia and managing director of East Coast Bakehouse, believes that there is a recognition of the needs of the sector.

"I think there's a realisation of the potential impact and the need for support. I would question the extent of it. Obviously more funds would be more useful for the companies and the extent of the funds that have been made available across such a wide scope of potential organisations is perhaps too limited," he said.

Lots of work has been undertaken regarding the extent of preparedness in the food industry and where the needs lie, said Carey. However, "there's an awful lot of work still to happen within individual businesses to develop specific marketing programmes for the UK and for new markets as the footprint of exports is broadened," he added.

"A lot of companies need a lot of support to get really ready to defend their position in the UK and to extend their export reach. In that sense there's still a lot of work to go in terms of being prepared for the impact."

Eoin O'Neill, president of the British-Irish Chamber of Commerce, believes that the Brexit loan scheme will be crucial to help smaller companies develop new markets. He highlights one largely missed detail that, at first glance, would seem to have little if anything to do with small, struggling Irish companies.

"The announcement of the additional €23m for foreign affairs and the announcement by Minister [for Foreign Affairs Simon] Coveney of the opening of five new embassies may not sound very significant to people. But I've been on the ground with ambassadors and I've seen the impact they have in a local market and their ability to start to open doors."

But for many SMEs struggling to keep the doors open, thoughts of new far-flung markets are remote indeed. Supermac's founder Pat McDonagh has spoken regularly about the problems faced by small businesses in Ireland, from planning to insurance to red tape.

"It's a neutral Budget, a fiver for everyone," he said, adding that he did not see many measures that would help SME owners that face unique difficulties.

"The big multinationals get incentives to come in here and get a good tax deal. Small business by contrast does not seem to be able to get through government to bring about the changes they need to help them," he said.

One such change that was widely touted ahead of Budget day was a possible cut in the 33pc rate of capital gains tax for entrepreneurs, but that did not materialise.

But one measure that could prove very beneficial to SMEs is the introduction of the Key Employee Engagement Programme, KEEP for short. It is a new share option scheme that will mean staff will pay less tax on share options from their company. Minister Donohoe highlighted the scheme as a boon to SMEs at the Budget Breakfast event, which was organised by INM.

Graeme McQueen, head of public affairs at Dublin Chamber of Commerce, said it was something that his body had been pushing for for a long time: "The only disappointment with it was that the rate of CGT that will be charged on it when you do eventually sell the shares is 33pc.

"The UK has a scheme where that rate is 10pc. What we always say as a Chamber is that we need our tax regime for SMEs to match or better, or certainly rival, what's in the UK.

"It's a welcome move but there's probably work we can do in coming years in coming Budgets to make that even more attractive for companies and for staff as well.

"We'd probably have liked to see more in terms of CGT improvements. We've made good progress on that in the last couple of Budgets but there was nothing really on that this year. So that's probably something that we'd like to see revisited next year.

"But overall I think we were fairly happy given it wasn't the most adventurous Budget. For business, I think we did OK."

Kildare-based accountant Pat Sutton agrees that the share option move is one with a lot of potential for the type of SME clients with which he deals regularly.

"That is something that SMEs might have a serious look at but there is a lot more that could have been done. It's a steady kind of Budget but there are a couple of areas that just were not addressed. "Leaving the entrepreneurial relief threshold at a €1m is a problem. Look at the UK, where it is £10m. I thought they would address that."

The self-employed earned income tax credit increased to €1,150. But, said Sutton, it should have gone to €1,650 to match the situation for PAYE workers.

"It penalises self-employed people yet again. It's no different than the 3pc USC surcharge on incomes over €100,000 for the self employed. What about PAYE workers earning over €100,000? Why the distinction between one and another?

"There is a fairness issue there that has not been addressed. They really could have done more for the self-employed," said Sutton.

Donohoe's key message since the Budget has been that his key priority was to return stability to the public finances and no one would argue that he has not achieved that. He has indicated that next year he will have room to do more of what people might want and the SME sector will be waiting and watching to see if he lives up to that promise.

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