Support for entrepreneurs is vital for growing economy

The next government must provide incentives for people starting new businesses

 

I am frequently being asked at the moment what entrepreneurs want from the next government. Perhaps we need to turn that question on its head: what does the next government want from entrepreneurs?

The answer seems obvious. Government wants high quality, well-paid jobs for Irish people and wealth creation that is widely spread and can support services for our people (through taxation) and a virtuous circle of re-investment in entrepreneurial activity. They also want to ensure we remain competitive with other jurisdictions so we can retain Irish entrepreneurs and attract foreign ones.

The problem is that businesses start small. They do not announce hundreds of jobs in rural towns. They have very little influence and have largely been an afterthought to foreign direct investment for successive governments.

But start-ups matter. Small businesses reportedly employ 70 per cent of people in Ireland. In the US, virtually all net job creation comes from firms that are less than five years old. In other words, big business consistently loses jobs overall. Those lost jobs are replaced and new jobs are added by start-ups.

Start-ups can and should play the same role here. So, what should the next government do to achieve its own objectives?

First, we need more entrepreneurs. So becoming an entrepreneur should be financially attractive relative to being an employee. Under no circumstances should an entrepreneur pay more tax than an employee. Right now they do.

This means giving entrepreneurs the same tax credits as employees and eliminating the three-percentage point USC supplement that entrepreneurs pay on income above €100,000. Most mainstream political parties seem committed to addressing this but delivery has been slow. The capital gains tax regime should also reward the risks taken by entrepreneurs.

Job-creating ventures

Gains from risky, job-creating ventures are treated in the same way as those from passive, non-productive investment in property. Fine Gael has proposed reduced CGT for businesses started after 2016 that are held for at least five years. Apart from being unfair to entrepreneurs who have already started a business, this proposal will have no impact until 2022 and will, in all likelihood, lead some founders to “re-start” their businesses post-2016.

It has been shown that a lower CGT rate can increase the amount of tax collected. There is no reason to introduce another discriminatory rule in our tax code.

Second, a government should make it easy for small companies to share the wealth created with employees. This is a crucial incentive to attract talent (locally and from abroad) but it is also fair. The best way to do this is by sharing ownership in the business through share options.

Unfortunately, the taxation of share options is complex and penal. The system needs to be simplified and, ideally, share options gains should be taxed as capital gains (as they are for the most part in the UK) rather than as income.

Finally, government needs to make sure that the fuel start-ups need for growth is widely available. That means cash in the form of equity investment.

There is plenty of money available in Ireland. Irish people hold huge cash deposits. Unfortunately, investment in early stage companies is not rewarding relative to the risk involved. Irish people prefer to leave their money in deposit accounts or invest in property.

As a result, the Government has had to intervene to make capital available. Enterprise Ireland has become the major supplier of capital to early stage export businesses. It does this in two ways, through direct investments in more than 100 start-ups every year and by investing in seed and early stage venture capital funds, which then invest in these start-ups.

Often, more than half the investment in a start-up will come from the Government. Would it not be preferable to incentivise the private sector to provide this? It would do so faster and more cost-effectively and would reduce the Government’s financial exposure to risky start-ups. It would also allow Enterprise Ireland to focus on the many other aspects of enterprise development which it does so well.

The UK’s Enterprise Investment Scheme scheme has shown how effective incentives for angel investment in start-ups can be. The creation of an effective Irish equivalent is long overdue.

Brian Caulfield is chairman of the Irish Venture Capital Association and and non-executive director of The Irish Times

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