Time to focus on domestic innovation

Despite significant progress on taxation and other industrial policy issues during the past year, KPMG managing partner Shaun Murphy believes the Government may have missed some important opportunities to offer greater support to indigenous enterprise and entrepreneurship generally.

“We have done very well in many respects,” he says. “When I look at where we have to go in 2014 and where we have come from to get there we have certainly had a very good year in terms of the economy.

“We have also had a good year in relation to policy. From the perspective of FDI, progress was made in relation to the R&D tax credit and the SARP regime for employees while greater clarity was brought in terms of corporation tax issues.”

But all is not completely rosy in the garden.

“Unfortunately there is quite a gap when it comes to domestic innovation and indigenous enterprise,” Murphy points out.

“I think the government is missing opportunities there. When you look at the income tax position of entrepreneurs and innovators and you say that these risk takers should pay tax at 55 percent when they are earning more than €70,000 a year there is something very wrong. Also, the way our system works the people who are taking risks are taxed more than their employees, that’s very odd.”

He is dismayed by the inaction in this area.

“All we get is silence when it comes to the tax treatment of domestic entrepreneurship and the indigenous sector. All of the effort seems to be going into the mobile investment piece. The UK has introduced a number of measures to support innovation and entrepreneurship and incentivise risk. Also, they don’t punish you as much if you fail there; the insolvency regime is far better. These are areas that have been missed out on in terms of policy.”

Regional development

The payback for increasing support and changing tax policy for domestic enterprise goes beyond headline job creation and other numbers and includes greater regional development balance according to Murphy.

“When FDI companies come here they say they want to locate to Dublin or Cork, or they might go to Galway and most of them won’t go anywhere else,” he adds. “By supporting indigenous enterprise you could probably get better regional development.”

The point here is that FDI will always choose the most attractive locations when they are coming to the country but we already have entrepreneurs and would-be entrepreneurs living in towns and cities throughout the country.

“By incentivising them to take risks and start up enterprises development will be more evenly spread across the country.

But getting those potential entrepreneurs to stick around and take a risk by starting their own business instead of moving to Dublin or abroad to work for somebody else is the nub of the issue.

Psychological issue

“If an entrepreneur doesn’t incorporate they see the Government take more of their profits than they do. There’s a psychological issue at play there. If the Government is going to get more than you do that’s a difficult problem to get over.”

He says the UK example is worth examining.

“I don’t think we should be slow to look at what’s happening in a jurisdiction close to us. The UK has a 10 per cent rate of capital gains tax almost for a lifetime for entrepreneurs, for example. If a guy wants to set up a software business here in Dublin and then wants to give €1 million worth of shares to a key staff member that would attract €350,000 in capital gains tax.

“In the UK it would be €100,000. The government here seems to look at this in terms of it costing them €250,000 to reduce the CGT rate but that’s not the way to view it at all. The high rate of CGT is probably preventing these share transfers happening at all so it is actually costing money.”

He is quick to point out that we shouldn’t be too restrictive in our view of entrepreneurship.

“We need to change the tax regime to attract mobile entrepreneurship. We want to attract risk-taking entrepreneurs from overseas to set up here as well as the major corporations.

“At the moment if they have a choice of either Dublin or London to set up they’ll probably choose London. That situation needs to be changed.”

Murphy concludes by pointing to the need for greater promotion of female entrepreneurship.

“Female entrepreneurship needs to be promoted as a further catalyst for innovation and this is why KPMG is supporting the Going for Growth initiative. Ireland needs more people starting and growing businesses.

“We’re supporting Going for Growth as it provides valuable mentoring support for female entrepreneurs at an early stage. It stands to reason that innovation has a better chance of thriving when the environment is positive and the right supports are in place.”