Tax measures to be introduced in Budget 2025 must not add to the already heavy compliance burden facing SMEs and promote greater investment in domestic business. Kim Doyle explains why
The Irish economy needs both domestic direct investment (DDI) and foreign direct investment (FDI) to grow and diversify while supporting a sustainable tax base.
According to the CSO Business in Ireland 2021 report, small and medium enterprises (SMEs) accounted for 99.8 percent of all businesses and over 69 percent of persons employed in Ireland. This demonstrates the vital role SMEs play, acting as the “engine room” of the Irish economy.
While there are numerous forces already driving a successful entrepreneurial landscape in Ireland – such as a skilled workforce, digitalisation and technological advances – our tax system is critical and should act coherently to drive domestic investment and support a strong SME ecosystem.
Additional tax measures should be implemented to build stronger DDI and provide an attractive entrepreneurial landscape for SME growth and scale-up.
Now is the time. Budget 2025 is a couple of months away. New tax policies and changes to current tax measures may be announced on budget day. I hope the following tax measures for SMEs are included.
Capital gains tax retirement relief
Age limits on retirement relief of €10 million for individuals aged between 55 years and 69 years and €3 million for individuals from 70 years, where the disposal is within the family and made on or after 1 January 2025.
These limits will deters the transfer of family businesses during the lifetime of an entrepreneur and presents problems in the transfer of a family business to the next generation.
While a business may be valuable and exceed these limits, there may not be liquid funds to discharge a tax liability arising on a transfer of that business. This would be for the benefit and longevity of the business. This may delay family successions until such time that the transfer occurs as part of an inheritance.
Such an outcome is counterproductive, considering that the purpose and intent of retirement relief is to facilitate transfers of businesses to the next generation at an optimum time for the business rather than on the death of the owner.
Stamp duty relief
Currently, relief from CGT (e.g. retirement relief, revised entrepreneur relief) and Capital Acquisitions Tax (CAT) – e.g. business relief – may apply to the passing of a business to the next generation. Such transfers often include commercial property.
There is no relief for the 7.5 percent stamp duty charge arising on the transfer of the property, however. Consanguinity relief should be extended to encourage and support lifetime transfers of business property to the next generation.
Angel investor relief
Angel investor relief could be simplified and conditions eased to provide the intended benefits to innovative SMEs.
The reduced CGT rate of 16 percent (or 18 percent in the case of investment through a partnership) for angel investment in innovative start-ups is a positive measure and should open the door to much-needed investment. This may help the sector to grow and foster entrepreneurship in Ireland.
Numerous conditions must be satisfied to qualify for this relief, however, and there are penalties for getting it wrong. Practically, this means this relief may be difficult to avail of and the flow of benefits to innovative SMEs may be hampered.
The relief needs to be simplified and the conditions made less onerous in order for this relief to provide the intended benefits to innovative start-ups and their investors.
Decarbonisation and digitalisation
New decarbonisation digitalisation credits would assist in addressing the reality that SMEs are working to keep up to speed with mega trends in both areas.
They may be doing this either by researching, developing and delivering products to address the impact of these trends or by implementing relevant technologies in the business.
This could be modelled on the research and development (R&D) tax credit regime, such that a new decarbonisation credit would support businesses seeking to lower carbon emissions and accelerate the decarbonisation process.
Similarly, a new digitalisation tax credit could support businesses with their digital transformation.
Simplification
A review of the statutory corporation tax return (Form CT1) and the Irish tax legislation is needed.
The Form CT1 has become cumbersome in recent years, mainly due to the volume of significant tax policy changes requiring additions to Form CT1.
There is an opportunity to simplify the Form CT1 and ease the administrative burden, particularly for SMEs not within scope of recent tax policy changes driven by international tax reform.
The establishment and ongoing work of the Tax Administration Liaison Committee Sub-Committee on the Simplification and Modernisation of Business Reliefs for SMEs is an important forum for stakeholders to work together to identify opportunities to simplify and modernise the administration of business supports.
Now, though, the government must review other areas of the Irish tax system. Irish tax legislation, particularly the Taxes Consolidation Act 1997, should be reviewed with a view to simplification as a matter of priority.
The SME Test
The Department of Enterprise, Trade and Employment’s SME Test is to help policymakers consider the potential impact of any new legislation or regulation in terms of the regulatory burden it places on SMEs.
The SME Test should support the design of tax policies that reflect less stringent compliance requirements for SMEs.
It is vital that new tax policies do not add to the already heavy compliance burden facing SMES, while also providing support, opportunities for growth and promoting greater domestic investment.
Kim Doyle is Director of Tax Policy and Technical Services at Deloitte
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