Finance, tax and business supports

As SMEs grapple with tough trading conditions, spiralling costs and mounting uncertainty, Michael Diviney looks at what they will need in The Next Financial Year

The exit of Ulster Bank and KBC from the Irish banking market has reduced competition in business lending considerably.

For too many SME owners and their advisors, this lack of competition is having a detrimental effect—a point made by Chartered Accountants Ireland in The Next Financial Year: Creating a Better Business Environment, our most recent annual position paper, published in July. 

If a business is not granted a loan by one of the two remaining pillar banks in the Irish market, it may have no option but to go to the other and accept its terms. Is this good for business? Most would agree that it is not.

What went wrong?

Among the 50-plus recommendations we have outlined in The Next Financial Year is the suggestion that the Irish Government carry out a review examining the reasons why Ireland has lost both Ulster Bank and KBC.

These reasons are likely to include the capital asset requirements of the Central Bank, regulatory costs associated with banking in Ireland, and the legal complexity of repossessing properties.

So, what can we do? We believe that there is widespread support for creating a third pillar bank and this role could be fulfilled by Permanent TSB, given the apparent lack of interest by foreign institutions in the Irish banking market. 

Permanent TSB announced a new €1 billion SME-lending fund earlier this year. Further investment is required to achieve the scale necessary to deliver the financial products and services needed by the SME sector, however. 

This is particularly important for the short- to medium-term as the economy emerges from the pandemic. For the long term, we recommend that the State continues its policy of reducing its ownership in the private banking sector. 

Supporting alternative lenders

As well as supporting competition in business banking, the Government also needs to recognise the importance of next-tier alternative lenders, which provide much-needed funding to SMEs. 

As it is, the non-bank funding market in Ireland is too small and requires state support to grow. In particular, the Strategic Banking Corporation of Ireland (SBCI) must continue to grow and develop its partnerships.

There has been some progress here with the announcement of the SBCI’s risk-sharing partnership with Metamo Credit Unions, and a separate agreement with Finance Ireland to provide €75 million in low-cost lending.

Now, the SBCI must continue to encourage niche asset financiers and non-bank lenders into the under-€1 million lending market, fuelling the competition needed to better benefit and support SMEs.

Grants and other supports

In addition to strengthening sources of SME funding, grant-aid and other supports also play a crucial role. 

Enterprise Ireland and the Local Enterprise Offices (LEOs) offer both. The problem is that they are aimed mainly at the manufacturing or internationally traded services sectors.

We suggest that the Government and its agencies consider widening the eligibility criteria for such grants to include the more ‘traditional’ industries and service sectors that are so important to local economies and communities.

We also ask if it is time to adapt the policies under which many grants and supports are offered—and on which the success of Enterprise Ireland and the LEOs is measured, i.e. the creation of new employment. 

In such a tight labour market, in which many people are working in the ‘gig economy’, are SMEs being excluded from important supports simply because they are not adding full-time equivalents? 

Adapting policy to the reality of Ireland’s 21st-century economy, we believe that performance measurement should be more balanced and include money spent domestically by State-supported businesses, for example on professional advice to help them grow.

Business financial planning grant

We have been consistent in our praise for the COVID-19 Business Financial Planning Grant administered by Enterprise Ireland. 

This scheme provides a grant to businesses of up to €5,000 towards the cost of engaging an approved external consultant to help them overcome challenges posed by the pandemic—but its design holds potential value beyond that.

The scheme helps a business to understand its immediate liquidity needs, create a financial plan to secure the external finance required for business continuity, and avail of a framework to manage the finances of the business.

We propose that the scheme be given a more permanent status, beyond COVID-19, to become the Business Financial Planning Grant, and extended to include a follow-up review after 12 months, and quarterly check-ins thereafter for up to three years.

This would serve to improve levels of financial literacy among business owners and managers, and address gaps in the financial management knowledge and skills of Irish businesses. 

Also administered by Enterprise Ireland, the Sustaining Enterprise Fund and Sustaining Enterprise Fund for Small Enterprises were both introduced to help businesses rebuild after the impact of the COVID-19 outbreak. 

No sooner had the pandemic begun to recede, however, then Irish businesses were hit by the effects of cost inflation caused by a global supply-chain crisis and the war in Ukraine. 

In the context of such geopolitical uncertainty, we propose that a Sustaining Enterprise Fund or similar be made available on a permanent rolling basis for companies impacted by current or future shocks outside their control—though with eligibility decided on a case-by-case basis. 

Again, we suggest here that the eligibility criteria be expanded to broader sectors of the economy beyond manufacturing or internationally traded services companies.

Capital tax reliefs

The SME sector relies heavily on capital tax reliefs such as Retirement Relief and Revised Entrepreneur Relief. 

Both tax incentives encourage entrepreneurs to invest time and money in their businesses—and both could be improved if the recommendations outlined in the external review, carried out by Indecon in 2019, were implemented.

The report recommended that Revised Entrepreneur Relief be retained as a valuable entrepreneurial support; that the requirement for the claimant to hold a minimum of five percent of ordinary shares be reformed; and that the lifetime cap of €1 million be increased to €12 million for entrepreneurs reinvesting in a new business.

Lowering capital tax rates

Though asset values have recovered since the financial crisis of 2008, capital gains tax (CGT) and capital acquisitions tax (CAT) rates have increased, and the high yields from capital taxes that flowed into the Exchequer during the ‘Celtic Tiger’ boom years have not been matched in recent years.

Is it time to consider lowering CGT and CAT rates? We think so, because this would likely lead to more private and commercial transactions, resulting in much-needed tax revenues. 

A lower rate of CGT could incentivise innovation and risk-taking, which would drive investment activity, thereby improving returns for entrepreneurs.

Chartered Accountants Ireland believes that a headline capital tax rate of 20 percent would be a more reasonable level of taxation on gains, gifts, and inheritances.

Measures introduced in Finance Act 2019 to enhance the R&D Tax Credit, particularly for small and micro enterprises, continue to await approval subject to Ministerial Order. 
These include: increasing the R&D Tax Credit rate from 25 to 30 percent; raising the limit applying to cash-refundable tax credits to double the payroll tax liabilities for relevant accounting periods; and extending availability of this tax credit to companies engaging in research and development before trading commences.