PwC propose tax changes to support entrepreneurs and family businesses

15 May, 2019

PwC Ireland have called upon the Government to make a number of changes to the Irish tax system in the upcoming Budget to support Irish entrepreneurs and family businesses in the current uncertain business climate.

The proposals are the result of a detailed consultation process undertaken by PwC with members of the DCU Centre for Family Business and the Family Business Network. The consultation process involved workshops, group meetings and direct feedback from members.

Ronan Furlong, Tax Partner in PwC's Entrepreneurial & Private Business practice, said: “The Irish tax system has been very successful in supporting the economy through the encouragement of Foreign Direct Investment. However, based on our consultation, there are a number of areas where the Irish tax code could be improved to better support Irish owned businesses.

"These proposals are straightforward and inexpensive and would help Irish entrepreneurs and family businesses create jobs, retain key talent, raise investment as well as help intergenerational succession. This becomes even more important in the light of Brexit as Irish private businesses want to compete on a level playing field with their counterparts in the UK.”

The key proposed changes

Supporting successful succession

  • Remove the arbitrary €3m cap on the value which can qualify for Retirement Relief on the transfer of shares for those aged 66 years of age and older
  • Increase the threshold for capital gains which can qualify for the reduced 10% rate of CGT under Entrepreneurial Relief (e.g. in UK the first £10 million of gains attract relief compared to €1 million in Ireland)
  • Remove anomalies from how CGT Retirement Relief is calculated to avoid confusion and to ensure that it operates on a consistent basis with Capital Acquisitions Tax (“CAT”) Business Relief
  • Introduce a ‘future use’ test to ensure that any business assets (including cash) which are considered essential for the future success of the business, are not excluded from Business Relief  on the transition of a business to the next generation
  • Remove the 90% cap to provide full relief from CAT under Business Relief, similar to the equivalent relief in the UK

Ronan Furlong said: “While current tax policy encourages the transfer of family businesses to the next generation at an early stage by minimising tax costs through the use of specific tax reliefs, there are certain limitations, anomalies and age limits associated with the current reliefs which may lead to higher than expected tax costs. This could potentially put the business at risk in some cases and, at the very least, discourage business owners from making lifetime transfers. Bearing in mind that the UK does not operate an equivalent gift tax on life time transfers and provides a more attractive Entrepreneur Relief, we need to ensure that Irish owned companies are properly supported and operating on a level playing field.”  

Supporting job creation and key talent retention

  • Remove the 3% levy on self-employed income
  • Provide more clarity on valuation requirements and greater flexibility within the Key Employee Engagement Programme (KEEP) share option plan to allow for  companies with more complicated group structures
  • Ensure participants of a KEEP share option plan can achieve a CGT tax outcome on exit in a share buy-back context
  • Extend KEEP to part-time employees
  • Consider alternative methods of incentivising and retaining key talent such as the Employee Ownership Trust which has proved very popular in the UK

Marie Flynn, Director, PwC Entrepreneurial & Private Business Practice, said: “Currently, for a variety of reasons, KEEP is not enjoying the same success in Ireland as its equivalent in the UK and, to date, only 38 individuals have been granted KEEP options. It is often appropriate to offer shares in a business to key management and employees. KEEP, if it was more tax efficient, could be a powerful tool in retaining key talent and aligning the interests of key employees with that of the business.”

Enhancing greater investment in Irish businesses

  • Increase the limits available for relief under the Employment and Investment Incentive (EII) so that it can compete with the more generous UK equivalent of the EII (e.g. UK £1 million per annum compared to Irish €150,000)
  • Allow ‘Put and Call’ options to facilitate investor exits from EII structures
  • Update the EII legislation so that investors can hold a qualifying shareholding through a Personal Holding Company
  • Allow for CGT treatment for exiting EII investors on “unconnected” share back scenarios
  • Implement an awareness campaign to highlight the tax benefits of the Start-Up Refunds for Entrepreneurs (SURE) for individuals looking to finance their start-up companies
  • Rectify the technical anomaly with the new Start-up Capital Incentive (SCI) to allow parents obtain relief by investing in companies controlled by their children

Declan Doyle, PwC Director said: “In our view, these further changes need to be introduced to encourage the take-up of these reliefs and also to maintain competitiveness with respect to the UK equivalents.  

“In addition, the Irish personal tax code imposes a 3% surcharge on incomes over €100,000 on self- employed individuals as compared to their PAYE counterparts. It is hard to see any justification for imposing this levy on a class of taxpayer who creates employment and invests in our economy.”

Changes to the Irish Tax Appeals System to enhance business certainty

  • The introduction of a ‘Small Claims’ division dealing with smaller tax cases
  • As in the UK, the reduction in current annualised interest rate of 10% to be more in line with market rates
  • Introduce a Certificate of Tax Deposit scheme for Tax Appeals
  • Introduce a ‘Tax Ombudsman’

It is important that the Irish tax self-assessment regime is fair, equitable and works in tandem with an efficient appeals process to create certainty for taxpayers in any situation where they believe their tax assessment is not reflective of the actual facts and circumstances. The costs (interest and legal fees) associated with the current Tax Appeals system, coupled with the blacklog of cases in the system are acting as a deterrent to tax payers submitting genuine Tax Appeals.

Supporting more tax efficient exit scenarios

  • Introduce a ‘bona fide’ test to the recently introduced anti-avoidance legislation to ensure that business owners are not subject to income tax on a sale of a business in a genuine commercial transaction

David Keary, Director, PwC Entrepreneurial & Private Business Practice, said: “The current situation is that income tax rates of up to 55% can apply to some sales proceeds as opposed to 10% or 33% for capital gains. This differential in tax rates is discouraging family business owners in selling the business to the next generation, and instead, may push them to consider other exit strategies not involving the family.”

Ronan Furlong concluded: “With the challenges and uncertainty of Brexit still looming over many Irish businesses and in a continually evolving international tax environment, we feel that there has never been a better or more important time to review the Irish tax system to assess whether it is fit for purpose in providing appropriate supports to ‘home-grown’ Irish businesses.”

ENDS

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Contact us

Ronan Furlong

Partner, PwC Ireland (Republic of)

Tel: +353 53 915 2421

Johanna Dehaene

Corporate Communications, PwC Ireland (Republic of)

Tel: +353 1 792 6547

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