Tax system for start-ups needs change of regime
Lack of Jobseekers Benefit for the self-employed is deterring people from starting a business
Niall Harbison and Emma O’Hara, co-founders of PR Slides: “We need way more [tax] breaks for people trying to start their own business or employing people,” says Harbison
Ireland is often described as a hotbed for entrepreneurship and a place of entrepreneurial overachievement with various reports describing us as one of the most entrepreneurial countries in the world.
In fact, the word entrepreneur was coined by an Irish person – economist Richard Cantillon who in the 18th century defined it as an “agent who buys means of production at certain prices in order to combine them into a new product”.
Yet, the 2012 Global Entrepreneurship Monitor (GEM) report, published last month, highlighted an overall decline in the rate of early stage entrepreneurial activity in Ireland, particularly among men.
It pointed to declining rates of company start-ups in 2012, showing the prevalence of early stage entrepreneurs in Ireland is at historically low levels. Worse still, it found that fewer people here aspire to starting businesses than in most peer countries.
Against this backdrop, huge advances have been made in access to seed and venture funding, incubator programmes and access to top level mentoring supports, with the Government and companies alike all taking giant steps in the promotion of entrepreneurship and start-ups.
So where are we going wrong, and why do so many Irish people only go it alone as a result of necessity? Many would say the tax regime and a lack of Jobseekers Benefit for the self-employed is deterring people from setting up their own businesses.
On the plus side, start-ups enjoy the same 12.5 per cent rate of corporation tax as the vast majority of other companies trading in Ireland. In addition, small companies incorporated after October 2008, which have a tax liability of less than €40,000 per year in their first three years of business, are exempt from tax.
However, entrepreneurs who chose not to incorporate their business operate as sole traders according to the Institute of Certified Public Accountants in Ireland (CPA) and their profits are taxed at income tax rates and are also subject to PRSI at the self-employed rate.
Thus they can end up paying up to 55 per cent tax, whereas the likes of tech giant Apple only pay 2 per cent. As a result, some early-stage entrepreneurs face higher direct and indirect taxes than mature corporations and PAYE employees.
Mark Craddock said the fact there is less protection and rights for the self-employed contributed to his hesitation setting up business-to-business telemarketing company Maven TM.
“If I had been a single man without a family I would have set up my own business in 2009 when I first had the idea. I had a wife and two kids with a third child on the way so the risk held me back.
“I sought advice from other entrepreneurs before I set up the business and was advised not to do it. It was also pointed out to me by advisors that there is less protection for the self-employed.”
He said PAYE employees have a guaranteed income coming in every month, whereas the self-employed have no such guarantees, and often have to go without a wage to build up cash in the company they have set up.
“I only took a salary six times in the first 18 months of running my business. There were huge challenges in terms of cash-flow that I didn’t expect.”