Innovation Talk: Government still rooted in bricks and mortar

The digital era falls in behind the old economy in Budget 2014


This summer’s film comedy The Internship features two wristwatch sales men – Billy (Vince Vaughn) and Nick (Owen Campbell) – who find themselves out of a job when their employer goes out of business. “Everything is computerised now” rings in their ears as they pack up, leave, and seek new jobs. They ultimately end up in an internship programme at Google headquarters in Silicon Valley, where they are plunged into a younger generation fully conversant with the internet, and somehow try to convince Google to give them a job.

One of the key backdrops to the movie is the demise of the traditional “bricks and mortar” businesses without an online sales capability, and their substitution by the virtual shopping experience of the web. It was thus very encouraging to see the Minister for Communications, Energy and Natural Resources announce, in conjunction with the recent budget, a pilot voucher scheme of up to €2,500 provided to 50 small companies to encourage them to develop an online presence. His department’s press release notes that fewer than one in four small Irish business are trading online, and that about 70 per cent of the current online spend by Irish consumers is made outside of Ireland.

In fact last July Mr Rabbitte had announced his intentions for a €2,500 voucher scheme for each of 2,000 companies to trade online in 2014. The budget thus confirms that financing is now in place for 2.5 per cent of his July scheme.

Tax exemption
A further positive announcement in the budget was the “Start Your Own Business” initiative. This provides that anyone who has been unemployed for at least the previous 15 months can receive a full exemption from income tax, up to a maximum of €40,000 a year, for two years. This should certainly assist the cash flow for early-stage businesses, whose owners frequently struggle to meet both tax demands and business loan repayments. Furthermore, the threshold under which small businesses can avail of receipts-based VAT accounting has been increased, so that VAT payments to the State can be deferred until creditors pay the business concerned.

For entrepreneurs, yet a further welcome initiative was the introduction of roll-over of capital gains tax (CGT) on serial start-ups. If an entrepreneur pays a CGT liability arising from the sale of a business, then reinvests some proportion of the remainder into a new business, and finally sells that second business at least three years later, then the CGT liability arising on the second sale can be reduced (by the lower of the original CGT paid, or 50 per cent of the new liability). There are details to follow in the Finance Bill: for example, what defines an entrepreneur for the purposes of this fiscal measure? Can a successful entrepreneur merely be an angel investor and mentor for a start-up, or must the entrepreneur be an active employee and executive? Can a successful entrepreneur obtain CGT relief if – as is common – he or she concurrently reinvests in several different start-ups? Apart from clarification of the details such as these, EU state aid approval for the measure has also yet to be obtained.

As I noted in my piece in this column on October 7th last, the Kenny administration increased CGT for entrepreneurs, over that of the Cowen administration, in the 2013 budget. Irish entrepreneurs thus became liable for CGT rates at over three times that of their UK peers. As one wag tweeted, why not move north to Newry – and then talk to the IDA about investment into the Republic! The roll-over initiative just announced in the 2014 budget will hopefully reduce CGT liabilities, encourage serial entrepreneurship and also reinvestment of capital at home rather than into more favourable jurisdictions.

There is a sincere effort in the budget to encourage and assist both start-ups and entrepreneurship. As Mr Rabbitte noted, the digital economy is growing by about 16 per cent per year, and thus by a factor of 10 of the economy as a whole. There are both skills and job shortages, and the digital economy has been restrained by under-capacity. It is also positive to see an awareness of the opportunity in the indigenous digital economy, rather than just the activities of the multinationals.

Old economy
Nevertheless, the Kenny administration, like so many before, is clearly still very firmly entrenched in the old economy of bricks and mortar. Consider this: an entrepreneur who builds a successful start-up, eventually sells it, and then goes on to build another successful start-up and then eventually sells it – in both cases creating employment over at least several years – can, as a result of Budget 2014, now on the second sale claim relief for half the rate of CGT (ie 16.5 per cent). However as a result of the same budget, if an entrepreneur purchases bricks and mortar before the end of 2014; refurbishes the property – thus temporarily providing jobs in construction; holds the building for seven years and finally sells it, then minimal or even zero CGT is applicable. Despite everything that has happened during the Celtic Tiger, our current administration still seems to favour bricks and mortar over the new digital economy.

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