As I write, Budget 2020 is a matter of days away and will have issued by the time you are reading this. As usual, various interested parties have made their pre-Budget submissions and ….. as usual, many of the professional institutes and industry lobby groups are calling on the Government to do all they can for SME business

CCAB-I’s Pre-Budget 2020 Submission, entitled ‘Tax Supports for Domestic Entrepreneurs’, states clearly in their introduction, ‘The opportunity to introduce measures to nurture our domestic entrepreneurial sector in Budget 2020 should not be missed given Ireland’s over reliance on tax revenue from a small number of mobile multinational corporates and the spectre of a chaotic exit by the UK from the European Union.’

Over the past few years there have been calls from all quarters to improve the tax environment for SME business; given the looming threats to the Irish economy from the OECD BEPS project, the worsening international trading environment and Brexit, these calls are ever louder and more insistent. So what is being done in response?

Tax-Incentivised Funding for the SME Sector

Finance Act 2018 introduced an over-hauled Employment and Investment Incentive (EII) scheme, Start-Up Refunds for Entrepreneurs (SURE) scheme and a new Start-Up Capital Incentive (SCI) scheme, all of which are available to SME businesses only. This followed a 2018 report prepared by independent consultants on then-existing schemes, and was followed by a Department of Finance public consultation in May of this year. The output from this consultation was reviewed in the Budget 2020 Tax Strategy Group Papers – 5/19 Tax Incentives for SMEs, which were prepared for consideration by the Department of Finance in framing Budget 2020 and Finance Bill 2019.

That’s an awful lot of consultation! And the big question is whether we will see practical and meaningful changes to the EII, SURE and SCI schemes in Finance Bill 2019. There have been various recommendations made to increase the effectiveness of the regime, including:

• Raise the €150,000 annual investment limit per investor.
• Grant full income tax relief of 40% in year one.
• Extend relief to USC and PRSI, thereby extending the value of the relief from 40% relief to a potential 55% relief.
• Allow investors to offset capital losses (net of tax relief claimed) for unsuccessful investments.
• Allow investors to claim CGT Entrepreneur relief, applying a 10% CGT rate on gains arising on investments.
• The introduction of a scheme for ‘micro’ SMEs, including enhanced investor return based on the higher-risk profile of ‘micro’ businesses.

As important as positive changes to the availability of the EII/SURE/SCI schemes are changes to improve the administration of the schemes. Finance Act 2018 introduced a self-certification model, though Revenue approval may still be secured in respect of some aspects of the General Block Exemption Regulations (“GBER”) rules applicable to these reliefs. As one of the GBER rules requires SME businesses that have been operating for more than 7 years to have a business plan based on entering a new product/geographical market, it is highly likely that older SMEs will continue to rely on Revenue advance approval. And administration blockages in that approval process will continue to have a negative effect on the availability of these schemes.

Another significant Finance Act 2018 change is that, where income tax relief has been claimed and the investee company ceases to be a ‘qualifying company’ during the 4-year investment period, then the clawback of income tax liabilities will fall on the company and not the EII/SURE/SCI investor. This increases the risk for the investee company and may make the schemes unattractive; more needs to be to reduce the administrative burden and to support SME business relying on these schemes.

Encouraging Innovation in the SME Sector

Though open to all types of corporate taxpayers, most R&D tax credit claims (by value) made in this country are submitted by non-SME businesses, mostly by large FDI companies. It is understood that there are many indigenous SMEs that are carrying out qualifying R&D activities, and yet are not claiming R&D tax credits. This is an indictment on the conditions attaching to, and process for claiming, R&D tax credits. A Department of Finance consultation on the R&D tax credit was carried out in June of this year, and the output from this consultation was also included in Budget 2020 Tax Strategy Group Papers – 5/19 Tax Incentives for SMEs.

Recommendations for amendments to the R&D tax credit regime, as it impacts SME business, include:

• A pre-approval process for first-time R&D tax credit claims for small/micro companies.
• Currently a small/micro business in receipt of an R&D grant from Enterprise Ireland/IDA will not be assessed on whether the activities are ‘qualifying activities’ for R&D tax credit purposes where the value of the tax credit claim is a maximum of €50,000. If no pre-approval process is provided, then this value to be increased to €100,000.
• Consolidate the 3-year R&D tax credit refund into one year for SME business.
• Introduce pro-forma R&D templates and/or SME-friendly guidance to allow SMEs to overcome the administrative burden of making claims.
• Increasing the thresholds, or better still removing altogether, the restrictions on outsourcing.

The importance of having certainty over whether an SME business has a valid claim for R&D tax credit cannot be overstated. For as well as providing comfort that a future Revenue audit of the claim would not result in a clawback (along with interest and penalties), having a valid entitlement to an R&D tax credit claim may also set the business up for accessing the Knowledge Development Box (KDB) regime. The KDB regime allows for a 6.25% corporation tax rate on profits arising from the specified trade of exploiting a “qualifying asset”, where that asset was generated from qualifying R&D activities. Within the KDB regime a “qualifying asset” generally refers to patents and computer programmes. An expanded regime for SMEs allows for inventions that are not patented, but are certified by the Patents Controller as being “novel, non-obvious and useful”, to be regarded as “qualifying assets” within the KDB regime.

As the first claims for the SME KDB regime were only possible in 2018, we are in the very early years of this regime. Already, however, we are seeing that the complexity of the rules are turning SME businesses away from this hugely beneficial regime. Calls have been made to simplify the rules for SMEs and to provide guidelines in relation to the type of documentation and tracking required to meet the necessary conditions.

Retaining SME Employees

There are two tax reliefs to highlight here; one of which is still new but already regarded as so complex and uncertain as to be ineffective, and the other introduced in 2012 and barely utilised.

Finance 2012 saw the introduction of the ability for a company to surrender its R&D tax credit to a ‘key employee’ but only a very small number of “key employees” have ever been in receipt of such a credit. Added to which, the Department of Finance consultation on the tax credit (referred to above) made no reference to this aspect of the tax credit regime so it is hard to escape the conclusion that it is practically irrelevant.

Finance Act 2017 introduced the Key Employee Engagement Programme (KEEP) with the stated aim of “supporting [SME business] in their efforts to attract and retain key employees … by providing for an advantageous tax treatment on share options.’ (Minister for Finance Paschal Donohue, Budget Speech 2018). A welcome and positive aspect of this share option scheme is that, unlike approved profit sharing schemes and SAYE schemes, it is potentially available to “key employees” on a selective basis. While the scheme is still new – it operates in relation to share options granted on or after 1 January 2018 – already tax advisers have highlighted that the conditions are so restrictive and complex that, as currently structured, it has very limited use. KEEP was also subject to a Department of Finance public consultation in May of this year and the output from this consultation was also included in Tax Strategy Group Papers – 5/19 Tax Incentives for SMEs. The recommendations for amendment to the KEEP conditions are too numerous to list here; perhaps the final word on how much change is required is the statistic that, as at May 2019, only 38 employees had been granted KEEP options.

Conclusion

The consultations have been done. The Department of Finance has all the technical and practical input it needs to make the various tax reliefs discussed fit for purpose; as engines to drive the growth of indigenous SME business. Just as this article opened with a quote from a pre-Budget 2020 submission appealing for assistance for SMEs, so it closes. New lobby group Scale Ireland, which has been established to represent ‘innovation-driven enterprises’, calls for changes to all of the tax reliefs discussed above in Budget 2020. Its chair says that ‘Brexit and global economic changes are exposing our over-reliance on FDI. We need the Irish economy to be firing on two cylinders.’ Here’s hoping for positive changes in Finance Act 2019!