To scale up, we need to stop punishing entrepreneurs

18 Apr 2017

Top of the Torc Mountain in Kerry. Image: gabriel12/Shutterstock

If we really want to see entrepreneurs flourish and companies scale up, a new approach to taxing owner-managers is needed, writes John Kennedy.

A wise friend – an insider who revels in the Yes Minister antics within the highest echelons of what passes for the establishment in the Republic of Ireland – once pointed out that if you put two journalists at bar stools for a night, that is how you get consensus.

I would venture further and say that if we put three Irish people on bar stools, they would divide into two or three political camps.

Put civil servants, ministers, TDs, trade union leaders and management consultants at the same bar and we get a complex stew that we somehow call ‘policy’.

‘The first thing we need would be a radical reform of taxation of share options, which, frankly in Ireland, is an absolute scandal and a real barrier in terms of your ability to attract talent from abroad’

And somehow amidst this dangerous sideshow, ordinary people go about their daily lives, running the gauntlet because of decisions made by people they will never know.

We see the impact of policy on lives every year around Budget time when tweaks are made to carers’ allowances, or vital services get cancelled or curtailed, such as special needs education.

Running up that hill

What doesn’t make the national headlines or radio waves is the silent dignity and courage of owner-managers of SMEs or entrepreneurs leading start-ups, who are bearing the brunt of an unfair tax policy.

They are the backbone of the Irish economy. They have survived almost a decade of recession and kept as many people in jobs as they could. They are not as glamorous as the multinationals, but they continue to employ people and don’t get the recognition or the progressive tax policy they deserve.

Remember, these are the individuals who are expected to be the driving force to create 200,000 jobs in the next five years in the local economy through start-ups and scale-ups.

So why are we punishing them for being entrepreneurs? Now is when we need them the most as the clouds of Brexit descend on Europe.

No small country for entrepreneurs

It emerged in recent days that the Government is looking at ways of adjusting the tax system to help high-performing SMEs expand and develop.

The Minister for Jobs, Enterprise and Innovation Mary Mitchell O’Connor, TD, wants a medium-term tax policy that helps SMEs to scale up. This includes an assessment of the current tax environment to pinpoint aspects of the tax code that negatively affect the competitiveness of SMEs.

Well, yes Minister, I can save you some time and money if you wish.

Misguided policy means that entrepreneurs and company owners bear a higher tax burden than their employees.

A recent decision to increase the earned income tax credit for self-employed workers and directors of companies by €400 in the last Budget was a step in the right direction, but still falls far short of the €1,650 tax credit for pay-as-you-earn (PAYE) workers.

Then there is also the enduring, disastrous capital gains tax (CGT) saga. Every year, the start-up industry lobbies the Government to set out a more realistic CGT regime that rewards success, not punishes it.

Each year, the Government adjusts its position, promising more but doing little. Budget 2017 was a case in point. While CGT was reduced from 20pc down to 10pc, it was only for the first €1m of a trade sale, for example.

This means that overall, the tax on the sale of a company was reduced from 33pc down to 31pc in Budget 2017. Peanuts.

As noted entrepreneur and venture capitalist Brian Caulfield pointed out, this is pretty meaningless compared to the UK, where entrepreneurs pay three times less CGT.

“CGT on entrepreneurial gains is way too high. I have no problem if CGT was at the present level in terms of speculative gain,” Caulfield said in a recent interview.

“But if somebody starts a company and lives on beans for three years while they are bootstrapping their business and creating hundreds of jobs … when they sell the company, they deserve some recognition for the sacrifice that has gone into that.

“Not only that, but if they were adequately rewarded, they are more likely to recycle that investment by investing or building more businesses.

“But if I could pick one big reform, it wouldn’t be a reduction in CGT I would go for. The first thing we need would be a radical reform of taxation of share options, which, frankly in Ireland, is an absolute scandal and a real barrier in terms of your ability to attract talent from abroad.”

When it comes to share options, Ireland is just not at the races. Small companies are unable to reward employees for their faith and commitment on smaller salaries. Instead, they run the gauntlet of losing vital staff every time a new multinational rolls into town that can offer better conditions, opportunities and benefits such as healthcare, pensions and – yes, of course – share options.

“You could almost hear a Dublin start-up sigh every time there’s a new jobs announcement,” a Limerick entrepreneur told me last year.

Scale up the seeds of hope

And yet, despite the Government’s muddled approach to taxing entrepreneurs, people are still starting up with the hopes of scaling up.

Just last week, we reported on the new Building Block in Sligo town. Within three floors, the aspirations of start-ups, scale-ups and multinationals can be accommodated and there is the potential to create 200 jobs in the next two years. The new building will be connected to 1Gbps fibre broadband by Eir and the work-life balance advantages of living outside a major city are apparent.

In Galway, Bank of Ireland’s new StartLab West has gone live, with a second cohort of start-ups that takes in a broader swathe from across the Connacht region.

In recent weeks, Siro and Vodafone revealed plans to light up 1Gbps business hubs in 15 Irish towns.

Not only that, but business angels – seasoned business people who invest their own money in start-ups – invested €13.6m in 50 Irish start-ups in 2016, up 25pc on the previous year.

They see the potential, so why can’t the State do the same with a more progressive tax policy that rewards risk and accepts that failure is also a reality?

When the recession hit in 2008, we all knew someone whose business shuttered its doors. The frightening thing was the scale and the impact on ordinary people, who were as much a victim of tax policy as they were of the wider economic storm.

For example, how many carpenters or tradespeople do you know who couldn’t even qualify for dole because of whatever way they were advised to pay their PRSI as sole traders?

Either because of or despite policy, people are pressing ahead with their dreams and ambitions. They are starting up businesses, farmers are diversifying their farm enterprises and step-by-step essential infrastructure such as broadband is gradually getting deployed.

It could be the perfect storm that creates legions of jobs and therefore, more taxpayers and more funds for the exchequer and in turn, better services for the people.

For this, the State needs to step up and support entrepreneurs and owner-managers, to enable them to reward and retain employees and, ultimately, scale up.

The entrepreneurs and local business owners are doing their part; it is time the State did its part too.

Stop punishing entrepreneurs for daring to dream.

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John Kennedy is a journalist who served as editor of Silicon Republic for 17 years