SMALL FIRMS ASSOCIATION PRE-BUDGET 2017 SUBMISSION

Transcription

1 SMALL FIRMS ASSOCIATION PRE-BUDGET 2017 SUBMISSION Presented to: MINISTER FOR FINANCE, Michael Noonan, T.D. MINISTER FOR PUBLIC EXPENDITURE AND REFORM, Paschal Donohoe, T.D. MINISTER FOR JOBS, ENTERPRISE AND INNOVATION, Mary Mitchell O Connor, T.D.

2 Table of Contents EXECUTIVE SUMMARY... 2 INTRODUCTION... 3 CONTEXT... 3 TAXATION... 4 Taxation of entrepreneurs and the self-employed... 4 Ensuring work is rewarded... 5 PRSI... 6 Rewarding risk takers... 7 Other tax heads Labour market issues EXPENDITURE Capital expenditure CONCLUSION

3 1. EXECUTIVE SUMMARY Competitiveness must be at the heart of Budget The reality is that Ireland remains a high cost location with numerous barriers and disincentives for entrepreneurs and established businesses. The SFA calls on the Government to place the same importance on competitiveness over the coming years as they placed on macro-economic stability in the period following the financial crisis. Taxation Following the recent vote in the UK to leave the EU, the need to improve the Irish tax offering for indigenous business has never been more urgent. Priority recommendations: End discrimination against the self employed in the tax system to encourage entrepreneurship: o Abolish the 3% USC surcharge that applies to the self-employed o Increase the EITC to the same level as the PAYE tax credit o Introduce a voluntary PRSI system for the self-employed Reward work by increasing the entry point to the marginal rate of tax and decreasing the rate by 1%. Review employer PRSI to fulfil the commitment that the National Minimum Wage increase on 1 January 2016 would not penalise employers. Reduce the CGT rate to 20%, with a 10% entrepreneurial relief up to a lifetime limit of 15 million, to stimulate investment. Introduce a scheme similar to the UK s Enterprise Management Initiative for employee share options in small firms. Expenditure Ireland s poor recent record of capital investment, coupled with its evolving demographics, is leading to bottlenecks in transport, education, broadband, water, health and other public infrastructure. Capital expenditure must reach 4% of GDP as soon as possible. The Government should seek flexibility in the EU fiscal rules in order to exempt this investment spending. Priority areas for investment: Improving broadband infrastructure, particularly in rural areas Developing public transport links Building a real motorway network Addressing housing shortages Enhancing education and in-work training 2

4 2. INTRODUCTION The Small Firms Association (SFA) is the trusted partner of small businesses in Ireland, with 8,500 members and four affiliated organisations in all sectors and parts of the country. Its mission is to deliver business-focused advice and insights to member companies, influence government policy to the benefit of small businesses and connect its members in a thriving community. The SFA has a vision of Ireland as the most vibrant small business community in the world supporting entrepreneurship, valuing small business and rewarding risk takers. Currently this vision is aspirational and significant policy reforms will be required to make it a reality. The SFA welcomes the opportunity to submit our views on Budget 2017 based on our experience, insights and knowledge of the small business community, which comprises over 200,000 businesses, employing half of the private sector workforce. 3. CONTEXT Competitiveness must be at the heart of Budget This Budget comes at a time when the tailwinds that have propelled the Irish recovery over the past number of years are waning. Ireland has benefited from low oil prices, exchange rates and interest rates, but these are all factors outside of our own control and liable to change. We must not let them distract us from the underlying issues. Instead, the focus must be on building solid, long-lasting foundations for business to thrive. Increasing global economic instability in the aftermath of the Brexit vote and rising domestic business costs create a very different context for Budget 2017 compared with Budget It is also critical to recall that while for many the fragility of the crisis years has passed, the recovery has not been consistent regionally or sectorally. Many small businesses are still waiting to feel the upturn. The SFA calls on the Government to place the same importance on competitiveness over the coming years as they placed on macro-economic stability in the period following the financial crisis. The attractiveness of the Irish business environment internationally determines the standard of living across the country, but the reality is that Ireland remains a high cost location with numerous barriers and disincentives for entrepreneurs and established businesses. This submission contains proposals for how the Government can improve the business environment and support investment and jobs through changes in the tax regime and taking a strategic approach to expenditure in Budget

5 4. TAXATION The tax system has a vital role to play in supporting development at each stage of the life cycle of a small business. It must constantly evolve to ensure that Ireland remains an attractive place to establish and scale a business. Following the recent vote in the UK to leave the EU, the need to improve the Irish tax offering for indigenous business has never been more urgent. The upcoming budget must support those industries for which the immediate fall-out from Brexit is greatest, including small firms. Helping these sectors maintain a competitive edge will be an important factor in overcoming the challenges that Brexit will pose. The tax system today has very mixed signals for business. The elements that represent disincentives to establish a business, take up employment or invest must be addressed, as outlined below. Tax reform is key to unlocking job creation, investment and growth and it forms an important dimension of making the Irish business environment attractive relative to the UK. 4.1 TAXATION OF ENTREPRENEURS AND THE SELF-EMPLOYED Budget 2016 contained some positive changes from a small business perspective. In particular, the introduction of a modest income tax credit for the self-employed was recognition of the discrimination that this group faces in the tax system, as the SFA has long highlighted. The remaining discriminatory elements must be dismantled as a matter of urgency. In the SFA s Summer 2016 Small Business Survey, reducing taxation on the selfemployed was identified as the most important change the Government could make to boost small business. We welcome the commitment in the Programme for Government to provide a supportive tax regime for entrepreneurs and the selfemployed. To make this a reality, it is critical that there is at least equity in treatment between employees and proprietary directors/self-employed people in the tax system and that business owners are afforded an equal level of protection as their employees in the event of business failure or illness. - USC surcharge The 3% surcharge on USC, which applies only to the self-employed, should be expired (as promised at the end of 2014). This surcharge is out of line with the aim of encouraging entrepreneurship and scaling up of new businesses and sends a confusing message to the self-employed about the Government s support for them. Cost: The SFA estimates that the abolition of the surcharge would cost 60 million. - Income tax credit 4

6 The introduction of a small Earned Income Tax Credit (EITC) in Budget 2016 was an important gesture to entrepreneurs and the risk-takers in the economy. However, the shortfall of the EITC relative to the PAYE tax credit means their effective income tax rates are still higher than those of PAYE workers with the same gross income. The SFA advocates an increase in the EITC to 1,650 for the self-employed and proprietary directors to match the PAYE tax credit. Cost: It is estimated that this would cost in the region of 120 million in a full year. 4.2 ENSURING WORK IS REWARDED As the Programme for Government highlights, high personal tax rates in Ireland discourage work and jobs. The current level of taxation has resulted in the erosion of domestic spending power, a reduction in the incentive to work and an increase in wage pressures, which currently represents one of the biggest threats to Ireland s competitive position. International evidence which shows tax systems with a broad base and low marginal rates provide the best outcomes for employers, employees and the economy. The SFA welcomes the acceptance by the Government that the income tax burden is now too high and has identified a number of policy changes throughout this document that would help to ease this burden. - Marginal tax rate We require a tax system that rewards work but, despite the changes in recent budgets, Ireland has one of the highest marginal tax rates in the OECD. Conditions around the marginal tax rate are crucial it is the main avenue through which income taxation affects economic growth due to its impact on the incentive to work and take on extra work, and on the attractiveness of Ireland as a destination for talent. While Ireland has one of the highest marginal tax rates in Europe, what is particularly damaging is that this rate kicks in at a level which is much lower than in any other European country, even below the average wage. This, coupled with the high marginal rate (49.5%) significantly reduces the benefit of working additional hours or receiving a pay increase. In fact, half of all workers face losing 49.5% out of every 1 they get in a pay rise. This especially impacts second earners whose labour market decisions are much more sensitive to tax and benefit changes. The SFA calls for the entry point to the marginal rate of income tax to be increased by 1,500 for a single person with a corresponding increase for married couples and other tax cases. Personal tax credits should be increased by 100 for all income earners. 5

7 Cost: These two measures combined are estimated to cost 338 million. In addition, the SFA strongly advocates a 1% reduction in the marginal rate of income tax. Cost: This would cost approximately 158 million. - Social welfare reform SFA members continue to report examples of the social welfare system working at odds with getting people into employment and increasing their hours of work. Evidence points to a number of social welfare traps, as households become less able to meet their needs when they move from unemployment to part time hours and part time to full time hours. The withdrawal conditions for social welfare payments, such as the one parent family payment, must be examined as part of a root and branch review of the social welfare system. Furthermore, the SFA calls on Government to introduce improved structures to incentivise social welfare recipients to take up part time work. Part time work has been shown to be a stepping stone to full time employment across Europe. However, the Irish social welfare system disincentivises jobseekers from taking up part time work. This situation could easily be rectified in one of a number of ways, for example by calculating social welfare on an hourly basis rather than on a daily basis; by allowing part time workers to work a certain number of hours per week before they lose their entitlements; or by allowing the hours worked and social welfare to be taxed as a whole in line with the current tax system. Another solution would be that people who work part-time are allowed to add up their working hours in a week and only have Jobseeker s Allowance cut when they reach the equivalent of a full day s work. 4.3 PRSI A number of facets of the PRSI system also require review to ensure that they are aligned with the aim of increasing Ireland s competitiveness and making it an attractive place to live, invest and establish a business. - Voluntary PRSI for the self-employed Owner-managers feel aggrieved that, despite contributing to PRSI, the self-employed have no safety net in case of illness or business closure. The commitment in the Programme for Government to introduce a PRSI scheme for the self-employed is welcome, but it is critical that this is established as a voluntary scheme. A mandatory scheme would be viewed cynically as an opportunity to impose additional taxes on small business. Instead, the self-employed and proprietary directors should have the 6

8 option to pay a modest PRSI top-up in order to qualify for social welfare benefits similar to their employees. - PRSI and the National Minimum Wage Budget 2016 introduced certain PRSI changes, effectively ending the step effect from an employee perspective and shifting the step effect for employers. However, the changes to employer PRSI cannot be considered an appropriate adjustment in the context of the new minimum wage of 9.15, as called for by the Low Pay Commission in conjunction with their recommendation on the rate increase. The changes offset less than 10% of the increased labour costs as a result of the NMW increase. The minimal level of the offset has resulted in even greater pressure on companies in labour intensive, low margin sectors, who have very limited scope to either absorb the cost increases or pass them on to customers. Therefore the poor alignment of the minimum wage and the tax system has increased the likelihood of the minimum wage increase costing jobs. The Government must fulfil its commitment that the NMW will not be anti-employer. These PRSI anomalies must be addressed in full in Budget 2017 to offset the NMW increase in January 2016 and any additional increase granted for PRSI for new businesses To encourage job creation the SFA proposes to phase in employer s PRSI for new businesses, so that they pay reduced rates of employer PRSI on staff they recruit in their first three years for example 25% for staff recruited in year 1, 50% for staff recruited in year 2, 75% for staff recruited in year 3 and then the full rate on later recruitment. This would incentivise earlier hiring. 4.4 REWARDING RISK TAKERS Being an attractive location for investment is a necessity if Ireland is to improve its underlying competitiveness. This includes not only being a destination for Foreign Direct Investment but also an attractive country in which to sell assets or invest in a small company, either through equity or employee share options. - CGT rate CGT is a key determinant of investment in the economy, which is a critical driver of growth. Ireland has one of the highest rates of CGT amongst developed economies at 33%. This puts Ireland at a competitive disadvantage when it comes to attracting and retaining mobile investment. By comparison, the UK rate is either 18% or 28% depending on the size of income and capital gains. 7

9 The SFA is calling for a reduction in CGT to 20% across the board, to make investing in a business in Ireland more attractive, in particular relative to competitor countries. History has shown that a lower rate of CGT substantially boosts the overall tax take, so the Exchequer will benefit from such a move. Furthermore, a special 10% rate for disposal of sites that have been granted planning permission should be introduced on a temporary basis for a three-year period. This would encourage the sale of sites that current owners are not in a position to develop and, as such, contribute to increased supply of housing. - CGT entrepreneurial relief Some improvements were made to the CGT entrepreneur s relief in Budget 2016 with the scheme being reformed and simplified. The SFA welcomes the commitment in the Programme for Government to further reduce the entrepreneurial rate to 10%. The statement that this will apply to new startups from 2017, however, casts doubt over the fair and equal application of the measure. Established businesses should not be treated less favourably than new businesses, not least as this would significantly delay the impact of the initiative. Furthermore, we believe that Budget 2017 should see Ireland improve its offering significantly when compared with the UK by increasing the lifetime limit for the 10% entrepreneurial rate from 1 million to 15 million. Cost: The cost would be in the region of 52 million in Employee share options Changes to the system of taxation for share based remuneration in recent years have reduced the attractiveness of such schemes to businesses. Addressing this issue will assist small and new firms to attract talented, experienced staff. It has the potential to improve skills in small business particularly management capacity, which is a persistent cause of business failure. It would also improve staff retention and productivity in small and new firms, in particular at senior levels, by providing a long term incentive and increasing employee buy-in. Uptake of Revenue-approved schemes is low in small firms. These schemes should be more flexible, in particular to allow share options to be granted in accordance with individual/team productivity and performance. The SFA also proposes that the 12,700 limit be reviewed. The employee PRSI and USC liabilities, which were introduced in 2011, should be removed, as this has decreased the uptake of these schemes. The tax treatment of non-revenue approved schemes must be overhauled in order to create a workable and attractive system for both employees and companies. The practice of taxing unrealised gains at the marginal rate of income tax must be ended. 8

10 The SFA proposes that the rate is reduced to the ordinary rate and that payment is spread over five years. A scheme similar to the UK s Enterprise Management Incentive (EMI) is needed for new and small firms in Ireland. The SFA proposes that this scheme would waive the income tax due on the gain between the granting and exercising of the option for employees within start-up and small firms. Instead they would only be taxed on the capital gain when disposing of the shares. Cost: The total 2017 cost for all of the measures outlined above would be in the region of 80 million. - Employment and Investment Incentive Scheme (EIIS) Currently, the EIIS does not function as intended and requires a rethink. An enhanced EIIS would encourage more friends, family and experienced local entrepreneurs to invest in small firms in Ireland. It has the potential to give small businesses financial leeway to allow business balance sheets to recover and to address the equity gap left by banks. Our specific recommendations are outlined below. Change the scheme rules: o o o o o Return to a five-year investment term so that the businesses have the necessary time to grow sufficiently to be capable of repaying the investors. Remove employment and R&D criteria these complicate the scheme unnecessarily. By definition if the business grows these will occur, but it poses unnecessary risk to the investor up front. Evaluate the cost-benefits of extending the scheme to other specific sectors. Exempt the gain from CGT if it is held for seven years (similar to property reliefs already in place). Examine UK and international models with a view to implementing Government risk-sharing models with private investors in similar schemes. This would be important to attract non-traditional EIIS type investors, and specifically other small business owners who might be interested in investing in other businesses. Return to BES as the scheme name, as this is more recognisable. Enhance publicity around the availability of the scheme. The only media reporting about the scheme tends to be negative, focusing on the tax writeoffs, as opposed to recognising the importance of facilitating equity investment 9

11 in what are viewed as relatively high risk domestic small businesses. In particular, it is important to promote the family and friends and private placement options, as well as funds option, and make it easy for companies to use the scheme without having to pay for expensive professional advice. 4.5 OTHER TAX HEADS - VAT The special 9% VAT rate for hospitality and related sectors has been a resounding success and has provided important support to regional employment. We believe that the economic rationale for the scheme has not changed and, in fact, support for the sector is needed more than ever in light of the Brexit vote and its exchange rate effect. The 9% VAT rate should be retained and made a permanent feature of the tax system. Furthermore, there should be no increases in other VAT rates or excise duties in order to avoid jeopardising domestic consumption. Shortages of housing units, especially in urban areas, are causing problems throughout the economy, distorting the cost of living and making Ireland a less attractive destination for FDI and mobile talent. Initiatives to encourage an increase in the supply of residential property should be brought forward in Budget A reduced VAT of 9% should be applied to the construction of residential property for two years to relieve the supply shortages without further increasing house prices. A 0% VAT rate should be applied to the construction of social housing. - Corporation tax The SFA supports the retention of the first three years corporation tax exemption for tax liabilities under 40,000. Very few start-ups get to avail of the full 40,000 exemption but it is a valuable support, allowing new companies to retain profits. Many small companies struggle with the pre-payment of corporation tax. The SFA proposes introducing retrospective payment for small firms and the option to pay in instalments throughout the year. - R&D tax credit Smaller firms and start-ups in particular face funding constraints for R&D investments. Despite this, the R&D tax credit s take-up among smaller companies has been weak. Only 1% of companies with turnover less than 1 million use the tax credit each year, compared with 12.5% above that mark. 10

12 In many cases, owner-managers who engage in R&D discover following tax assessments by external Revenue-appointed experts that they do not qualify for tax credits. They need certainty up front about what will and will not qualify for tax credit purposes, particularly in micro-enterprises, where owner-managers are likely to be engaging in R&D themselves. This will greatly incentivise such companies who are wary of expenditure on R&D in the absence of the tax credit. The SFA believes that it is necessary to create a specific, tailored R&D tax credit scheme for small firms to encourage more R&D spend an R&D Tax Credit Lite. Such a scheme should reduce the existing complexity by using pro-forma templates for R&D project management, recording of R&D activity and calculations of costs and revenue benefit. Simple on-line calculators should be developed to increase usability for small firms and targeted promotion of the scheme should be rolled out. Cost: The introduction of an R&D Tax Credit Lite along the lines outlined would cost approximately 5 million. 4.6 LABOUR MARKET ISSUES Irish labour costs are the tenth highest in Europe and 20% above the EU average. Irish small firms are at a competitive disadvantage relative to firms in the UK across a number of major business costs and total labour costs are 17% higher in Ireland than in the UK. This is a particular problem for small firms in the services sector where the cost of employing an individual accounts for between 72% and 86% of location sensitive business costs (i.e. costs which vary by location rather than being set by a worldwide market). The National Competitiveness Council has warned against complacency in relation to competitiveness and SFA members have highlighted wage inflation as the biggest threat to their business in the coming year. In light of this feedback and with 7.8% of the workforce still unemployed, it is crucial that the Government does nothing to put additional pressure on labour costs in Budget It is imperative for the competitive position of Ireland that wage levels are decided in a competitive labour market. Wages should not be determined by an artificial legal instrument such as the minimum wage. Any wage increases must be linked to improved productivity and the profitability of the business. 11

13 5. EXPENDITURE 5.1 CAPITAL EXPENDITURE Ireland s investment spend is currently among the lowest in the EU even though Ireland has the region s fastest growing population. In recent cutbacks, capital expenditure was the first thing to go, leading to a decade of underinvestment. Capital expenditure currently averages 2.2% of GDP per annum, the vast majority of which is spent on maintenance and repair as opposed to growing the country s social and economic capacity. This poor record of capital investment, coupled with Ireland s evolving demographics, is leading to bottlenecks in transport, education, broadband, water, health and other public infrastructure. This economic model is not sustainable if Ireland is to maintain its economic performance, and it is certainly not a recipe for improved competitiveness. As was stated at the outset of this submission, it is time to place as much impetus behind the competitiveness agenda as was behind macro-economic stability during the term of the previous government. On this basis, the Government must take a more ambitious approach to capital investment, going beyond the additional 5 billion foreseen in the Programme for Government. Capital expenditure must reach 4% of GDP as soon as possible. The Government should seek flexibility in the EU fiscal rules in order to exempt this investment spending. In terms of capital expenditure, the Small Firms Association has identified clear priority items that would improve the business environment, ensure that businesses and citizens around the country benefit from the overall economic recovery and assist with the attraction of Foreign Direct Investment and talent. The SFA capital expenditure priorities are: Improving broadband infrastructure, particularly in rural areas: The SFA welcomes the commitment in the Programme for Government that further funding will be made available if necessary in order to deliver the National Broadband Plan. It is imperative that no further delays to its rollout are permitted. Developing public transport links: Additional Investment is needed in public transport, in particular transport links between Dublin Airport and the city centre. Building a real motorway network: It is vital to continue to develop road connections throughout the country, in particular to join up regional cities. This would allow increasing volumes of passenger and freight traffic to move quickly around the country and improve access to services such as regional hospitals and educational institutions. 12

14 Addressing housing shortages: The current crisis in housing supply is impacting the whole of the Irish economy and society. Provision should be made to fast-track planning and procurement for key projects, in particular for sites with capacity for more than 100 units where all related services are in place. This measure, in conjunction with the CGT and VAT measures outlined in previous sections would encourage and speed up much-needed supply. Enhancing education and in-work training: Ireland performs poorly in terms of lifelong learning and research shows that investment in management capacity could reduce business failure by half. In light of falling unemployment, the National Training Fund should be re-oriented to focus on in-work training, in particular through Skillnets and specifically its ManagementWorks programme targeting small business. 6. CONCLUSION Budget 2017 will chart a course at a time when Ireland s economic future could follow a number of trajectories. Recent economic performance has been strong and small businesses generally view the current economic environment positively. However, business costs are rising, many of the fundamental policy challenges facing the country have not been addressed and the international environment in which Ireland operates is uncertain, in particular in light of the UK s decision to leave the EU. Small business can lead the way in helping Ireland to continue to broaden and deepen its recovery but in order to do this, the Government must create the right conditions by putting in place an enabling tax environment, curbing the cost of doing business (in particular labour costs) and delivering world class physical and digital infrastructure. More than anything, Budget 2017 must deliver competitiveness improvements to allow small business to put its best foot forward, domestically and internationally. For further information, please contact Linda Barry, SFA Assistant Director, on tel: / or linda.barry@sfa.ie. More information about the SFA is available at or on 13