Unfair taxation policy towards entrepreneurs

23 May 2005

The existing Irish tax regime whereby there is equivalence between the tax treatment of capital gains from high-risk start-ups and the treatment of gains from relatively secure property investments is impeding the progress of the sector, claimed the author of the Irish Software Association’s (ISA) strategy blueprint, Donal Daly.

The ISA report makes several recommendations with regard to leadership, funding and innovation and lists the main challenges faced by the industry. These include a dearth of revenue-oriented leaders, difficulties in attracting high-calibre non-executive directors to boards, inappropriate funding structures for high-tech start-ups and poor use of channel partners to grow revenue.

However, the report also points to a serious anomaly with which the Irish market views investing in entrepreneurs.

It cites a tax regime in which there is equivalence between the tax treatment of capital gains from high-risk start-ups – perhaps the most important element of our future economy – and the tax treatment of gains from relatively secure property. This leaves little incentive to fund the bright new ideas that might propel Ireland forward over the next 10 years, the ISA warns.

“That’s retarded as a policy,” said Daly, a serial entrepreneur who has led several successful software companies. He added: “Especially since the seed capital area of investment in Ireland is so poorly funded.”

Daly’s report also calls for the need for more finance from business angels – successful entrepreneurs that have made their fortune – in the seed capital and early-stage investment windows, to provide the venture capital community with a wider selection of propositions, from which they could choose a small number for large investments.

The report points out that in the US, entrepreneurs turned investors invest more than 20 times more than venture capitalists in high-risk ventures.

The fact that nearly half of the companies surveyed by Daly for the ISA blueprint have received investment of less than €2m could be explained by first-round investments in young companies, but only nine of the 35 oldest companies have received financial investment of greater than €2m.

“It is hard to find a significant percentage of technology companies anywhere in the world that have made their mark in any particular sector with such meagre funding,” Daly stated in the ISA report.

By John Kennedy