Anyone searching for a theme for Pascal Donoghue’s second budget didn’t have far to look. With forecast GDP growth at an eye-popping 7.5% and employment at record levels it was clear that the Minister’s overriding concern was to avoid upsetting a well-stocked apple cart. His tax proposals therefore are modest and, absent the tourism sector, are designed to have the widest possible appeal.
The problem with this approach is that it ignores one group that needs urgent attention, Ireland’s SME sector, comprising the indigenous companies that form the backbone of Ireland’s economy. For years the sector has benefitted from the 12.5% rate of Corporation Tax. To take advantage of this management salaries, by and large, have been kept low. Time passes however. Now an ageing population of entrepreneurs is keen to sell or transfer their businesses.
Their difficulty is that the various forms of retirement relief no longer make this a straightforward process. Last year’s Finance Bill saw the introduction, without warning, of provisions that expose the proceeds of sale of a business to tax at income tax rates as high as 55% rather than at the much lower rates that apply to capital gains.
This type of tax policy is blind to the structural defect that afflicts the Irish SME sector. The defect comes about because the majority of the companies that make up the sector are too small to justify a public flotation. As a result, the business of buying and selling Irish private companies often turns into a time-consuming process. Anything that can be done to make the process more dynamic should be done. A clear and unambiguous CGT rate that tempts ageing entrepreneurs to sell would fall into this category.