PRE-BUDGET 2015 SUBMISSION - "The Path to Growth" SMALL FIRMS ASSOCIATION SMALL FIRMS ASSOCIATION
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SMALL FIRMS
ASSOCIATION
SMALL FIRMS ASSOCIATION
PRE-BUDGET 2015
SUBMISSION
“The Path to Growth”
Presented to:
MINISTER FOR FINANCE,
Michael Noonan, T.D.KEY ISSUES
1. FISCAL ADJUSTMENT
Budget 2015 should only deliver the minimum net fiscal adjustment
package needed to reach the 2.9% fiscal deficit target.
2. SUPPORT INVESTMENT AND JOBS THROUGH THE TAX
SYSTEM
Enhance the EIIS by broadening the criteria and rebranding; Reform CGT
Entrepreneur’s Relief; Reduce CGT to 20%; Reintroduce lower rate of
PRSI for Employers; Amend Foreign Earnings Deduction scheme for small
firms; Introduce R&D Tax Credit “Lite” Scheme; Extend the 9% special
VAT rate and cap all other consumer taxes; Increase the VAT Cash
Receipts basis threshold to €2.5mn; Reform Local Property Tax to make it
more equitable and boost consumer spending.
3. TAXATION OF WORK
Reduce taxes on work by increasing the entry point to the marginal tax rate
to €34,800 and reducing the marginal rate to 40%; and dropping the
pensions levy. Incentivise more risk-takers setting up their own businesses
through expiring the 3% USC surcharge for the self-employed as planned;
equalising the PAYE tax credit for proprietary directors and introducing
voluntary PRSI contributions for self-employed to access unemployment
and illness benefits.
4. DON’T INCREASE THE COST OF EMPLOYMENT
Irish labour costs are 11th highest in Europe, 16% above the EU average
and 30.8% more than our nearest competitor, the UK. Government changes
in PRSI, illness benefit, redundancy rebate, health insurance and general
taxation all impact negatively. No further costs can be imposed through
Budget 2015.
5. MAKE WORK ATTRACTIVE
Remove social welfare traps on recipients coming back to work and taking
up additional hours. Maintain successful JobBridge and Jobs Plus
schemes.
6. EXPENDITURE PRIORITIES
Increase capital spending on infrastructure. Reduce current spending
through real efficiency-led public sector reform.
Page 2 of 9INTRODUCTION
The SFA welcomes the opportunity to present our pre-budget 2015 submission to the Minister for
Finance, Michael Noonan, TD, and to share with you our experience, insight and knowledge of the
small business community, which comprises 200,000 businesses, employing 655,000 people, half
the private sector workforce.
A big challenge for small firms, especially those trading on the domestic market, is the fragility of
the domestic economy and confidence among consumers. The SFA believes that Budget 2015
should only deliver the minimum net fiscal adjustment package needed to reach the 2.9% fiscal
deficit target. With stronger than expected economic growth and tax revenues, combined with
planned statistical revisions to Ireland’s GDP levels, this should be less than the previously
planned €2billion adjustment. This lower fiscal adjustment is critical to boosting confidence and
thus activity which leads us to the virtuous cycle of growth in domestic demand and employment
resulting in increased tax revenues, whilst social payments fall on the expenditure side.
The key to future success is investment and resulting growth. The key to our deficit reduction is
growth. The key to job creation is growth. Growth is generated by a combination of measures
including rising incomes, higher consumer spending, export growth, cost control, innovation and
investment in infrastructural deficits. However, any growth model must place small business at the
heart as they are the drivers of innovation and a permanent source of prosperity, employment and
economic progress.
In this submission we present concrete proposals for how the Government can support investment
and jobs through the tax system; we argue the need to focus on jobs through reducing taxation on
work, not increasing the cost of employment to employers and making work attractive vis-à-vis the
social welfare system; and outline our expenditure priorities in Budget 2015.
Page 3 of 9SUPPORT INVESTMENT AND JOBS THROUGH THE TAX SYSTEM
A key element of Budget 2015 must be the introduction of growth promoting measures in the
economy. SFA members believe that tax changes to support investment and jobs will be most
important in contributing to growth going forward. We have nine specific proposals in this
regard:
1. Employment and Investment Incentive Scheme (EIIS)
An enhanced EIIS is essential to allow business balance sheets to recover and given the equity piece
that Banks need to make a positive lending decision. Our specific recommendations are as follows:
Change the scheme rules:
o return to 5 years from 3 years investment term, so that the businesses have the
necessary time to grow sufficiently to be capable of repaying the investors
o remove employment & R&D criteria - these complicate the scheme unnecessarily -
by definition if the business grows these will occur, but it poses unnecessary risk up
front to the investor
o evaluate the cost-benefits of extending the scheme to other specific sectors
o the gain should be exempt from CGT if it is held for 7 years (similar to property
reliefs already in place)
o 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 BES/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 with a negative tilt from the perspective of the tax write-offs, vs.
recognising the importance of facilitating equity investment in what is viewed as relatively
high risk domestic small businesses. In particular 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.
2. CGT Entrepreneur’s Relief
The announcement of this relief in Budget 2014 was welcome and we urge the Government to
increase its efforts to get it through the formal EU approval process. However, we feel in practice
Page 4 of 9the scheme will not work in its current format as the relief is given after the sale of a second
successful business. In reality this means that it will take a decade before the entrepreneur will see
any return and the likelihood of having two successful start-ups in a row is questionable in any
event. This should be amended to match the UK scheme where you only pay 10% CGT if you sell
or close all or part of a business. On condition you've held the share for at least a year and you are a
director, partner or employee in the business, there is a lifetime limit on this of £10mn of gains so
the tax saving can only be up to £1.8mn over a lifetime.
3. Reduction in CGT
CGT in Ireland is 33% except for some reliefs to do with property which remain. This is one of the
highest rates in developed economies. For example, in the UK you pay either 18% or 28%
depending on size of income and capital gains. The SFA is calling for a reduction in CGT to 20%
across the board, in order to support investment in the economy, which is a critical driver of growth.
History has shown that a lower rate substantially boosts the overall tax take, so the Exchequer will
also benefit substantially by such a move.
4. PRSI – Lower Rate for Employers
The lower rate of employer PRSI which applies to employee earnings of €356 or less per week was
reduced from 8.5% to 4.25% as part of the 2011 Jobs Initiative until the end of 2013. This lapsed at
the end of 2013 with no announcement, which is unacceptable. It is now hitting payroll costs and
should immediately be re-introduced for a further 3 years to assist in sustaining and creating jobs.
5. Foreign Earnings Deduction
This scheme should be amended as follows to make it workable for small companies:
Increase the scope of the scheme by extending the list of applicable countries - include UK
and other Eurozone countries if possible given state-aid rules
60-days outside the EU should be reduced to 20-days (this is more realistic for a small
company); remove minimum number of consecutive days
Extend support to trade fairs, as it is expensive for small companies to take a stand at large,
international fairs.
6. R&D Tax Credit “Lite” Scheme
We believe that it is necessary to create a specific R&D tax credit scheme for small firms to
encourage even more R&D spend, which would reduce the existing scheme complexity by using
pro-forma templates for R&D project management, recording of R&D activity and calculations of
Page 5 of 9costs and revenue benefit. Simple on-line calculators should be developed and the scheme should
be promoted to small firms.
In many cases, owner-managers who engage in R&D are not qualifying for tax credits, following
tax assessments by Revenue appointed external experts currently. We need certainty 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, as this will greatly incentivise such
companies who are wary of expenditure on R&D in the absence of the tax credit.
7. Consumer Taxes
We compliment the Minister on his foresight in introducing the special 9% VAT rate for the
hospitality and related sectors which has been a resounding success and for its extension in last
year’s Budget. It is vital that this is further extended this year, as it has provided almost 1 in 4 new
jobs since its introduction.
We believe that there should be no increases in other VAT rates or excise duties. A reduction in
last year’s increases in excise duties on alcohol is warranted to reduce prices for consumers, remove
the threat of cross-border shopping and negate the negative effect on tourism.
8. Increase the VAT Cash Receipts basis threshold from the current €2 million to
€2.5million.
This would greatly assist small businesses in managing their cashflow, particularly given the
ongoing difficulties in accessing overdrafts from banks to cover the VAT payment, whilst they are
waiting for payment by their own customers (which can include government bodies such as local
authorities, HSE, etc.)
9. Reform Local Property Tax
The introduction of the local property tax has taken additional expenditure from the economy;
placing many households under further pressure and impacting negatively on consumer spend. In
order to encourage increased spending, the SFA believe a more equitable payment model could be
applied to the LPT, whilst at the same time ensuring revenue is received.
The SFA would propose that the valuation of a property tax should be based on the property value
less the outstanding mortgage. For example:
Page 6 of 9€
Property Value 500,000
Current Mortgage 200,000
Taxable Valuation 300,000
The guiding principle is that the individual will not pay tax on monies which they are already
paying interest on. This will also release additional disposal income to drive consumer spending
which has been the key area of weakness in the economy since 2008.
TAXATION OF WORK
We require a tax system that should reward work, but recent budgets have seen the tax burden
increase dramatically. Ireland now has one of the highest marginal tax rates in the OECD. The
marginal tax rate of 52% at average earnings is well above the OECD average of 36%; the UK at
32%; and France at 30%. Between Budget 2008 and Supplementary Budget 2009, marginal income
tax rates for the self employed, increased from 46.5% to 55%. The severity of these increases in a
short time frame has had a dramatic impact on business owners, taxpayers and on competitiveness.
They have resulted in a reduction in domestic economy spending power, the incentive to work and
growing wage pressures which could potentially destabilise our recovery.
Government accepts that the income tax burden is now too much and we believe that income tax
should be reformed in Budget 2015. Specifically, the entry point to the marginal tax rate should
increase from €32,800 to €34,800 for a single person (gross cost €240mn in 2015); and the marginal
rate of income tax should be reduced from 41% to 40% (gross cost €130mn in 2015).
In addition, the pensions levy should be dropped. The Government had previously committed to
ending the pension levy in 2014, but instead increased and extended the levy, so that people are
now fearful that it is here to stay. Not alone is the levy grossly unfair, as it is an expropriation of
capital sums saved by workers in the private sector, but it contradicts government policy on
promoting private sector pension provision.
In order to solve our unemployment problem, we are relying on more entrepreneurial people to set
up new businesses. It is critical that there is at least equity in treatment between employees and
Page 7 of 9Proprietary Directors / self-employed people in the tax system and that risk takers are afforded an
equal level of protection as their employees in the event of business failure or illness. Specifically
we recommend that the 3% surcharge on USC which applies only to the self-employed should be
expired as planned this year; that Proprietary Directors should receive the PAYE tax credit, where
they pay tax on a PAYE basis and that a voluntary PRSI contribution should be introduced, to allow
entrepreneurs and self-employed qualify for all social welfare benefits similar to their employees.
Any proposal which provides social welfare benefit for owner managers cannot be mandatory or
viewed as an opportunity to impose additional taxes on small business.
DON’T INCREASE THE COST OF EMPLOYMENT
Irish labour costs are still the 11th highest in Europe and 16% above the EU average. Irish small
firms are at a cost disadvantage relative to firms in the UK across a number of major business costs.
In terms of hourly labour costs Eurostat figures show Ireland’s are 30.8% ahead of our nearest
competitor, the UK, putting us at a distinct competitive disadvantage. This measure of labour costs
includes existing government subsidies and taxes on employment. This is a particular problem for
SMEs in the services sector where the cost of employing an individual accounts for over 80% of
location sensitive business costs (i.e. costs which vary by location rather than being set by a
worldwide market).
The government has added to overall wage costs in recent years through changes in PRSI, illness
benefit, redundancy rebate, health insurance and general taxation (which as mentioned above has an
upward effect on wages over the long term). It is critical that in Budget 2015, the Government does
nothing to put additional pressure on labour costs.
MAKE WORK ATTRACTIVE
SFA members continue to report examples of where the social welfare system is working at odds
with getting people back to work and increasing their hours of work. It is essential that action is
now taken to remove these social welfare traps. For example, an employee on Class A PRSI pays
0% on weekly earnings up to €352. Once they go above that, they then have to pay 4% on
everything, including the €352 that was exempt. This means that a person on the minimum wage
Page 8 of 9who works additional hours could end up with reduced net take-home pay. The 4% PRSI should
only be charged on earnings above the €352 to incentivise employees to work more hours.
The JobBridge Scheme continues to be well received by our members, with many converting the
internships into ongoing jobs after the completion of the programme, and should be retained.
Similarly, the Jobs Plus programme is working very well for small firms recruiting new employees.
EXPENDITURE PRIORITIES
Since 2008, capital expenditure has made up over 70% of total expenditure cuts of €7.7 billion.
This meant that over 60% of the infrastructure budget in 2011 was spent on maintenance of existing
capital rather than new projects. To avoid infrastructure deficits arising from predicted
demographic bottlenecks ahead, it is imperative that the Government restores capital spending in
future budgets. This can be done through off-balance sheet innovative financing mechanisms and
PPPs.
On the current spending side, it is imperative that real reform of state expenditure takes place, not
just cutting job numbers and pay for state employees, but real efficiencies in how things are done.
IN CONCLUSION
Our recovery must be based on restoring a sound macroeconomic base, reducing the cost of doing
business, boosting productivity, and ensuring the delivery of world class performance standards
across our public service.
Entrepreneurs and the small business sector, given the right economic conditions will generate the
growth needed to create jobs, overcome our debt burden and deliver the prosperity, and quality of
life that this country can legitimately aspire to. Small business can lead the way in helping Ireland
to continue to recover faster and stronger than others. We have done it before; we can do it again.
We trust that the Minister in Budget 2015, will enable us to do so by implementing the
recommendations in this pre-Budget Submission.
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