Business Owners – Trapped by our taxation system

Tax Breaks required for SME Businesses to repair their Balance Sheets:

Our Governments have had a long and successful history of enabling Ireland to become a modern industrial economy through the advent of foreign direct investment. Start-ups and exporters are revered and supported well through Enterprise Ireland and other support structures like taxation and Enterprise Boards.

However the majority of businesses who employ and create the majority of employment and wealth of the nation get little or no help. They exist and are trapped predominantly in the domestic economy and often struggle to be viable. The tax system often makes them distribute their earnings as they are regarded as close companies and thus the real rate of tax on enterprise is the combination of corporation tax and personal tax on dividends.

A modern economy is a service economy, but yet the Irish taxation system applies a surcharge of 15% on half of undistributed earnings of service companies. Surely companies should be encouraged to build the strength of their balance sheets so that they have war-chests to take on foreign markets, equity to survive future recessions and not least reserves to pay redundancies which are the unaccounted for liability on their balance sheets.

The taxation provisions are also anti small and medium size businesses. A close company is deemed as any business that is under the control of five or fewer. Why does it make sense that if I am sufficiently big I can bring in investors while keeping control of the company while carefully avoiding control from a taxation perspective or I can adopt a strategy of merely spreading my risk over a number of non close companies. However the smaller business who is not in a position to do this is destined to remain small as they have to distribute their earnings.

Take company A – a true case. Sole trader A incorporated his business to manage risk in the recession. However he was left with a tax bill without the resources to pay for it from his sole trading business. He had to pay himself an enormous salary which was then taxed, merely to cover the tax bill of the sole trade. However he was putting everything in jeopardy as the company could not afford the salary levels. This is a nonsense. Most businesses start off as sole traders in order to keep costs down. Then if they are successful and seek to incorporate face this big tax liability either through capital gains taxes on the sale of their business or are strangled through cash flow of having to pay taxes twice.

If we want to build seriously successful businesses who can grow and become international service businesses we must encourage development of the Irish SME Balance Sheets. Let our Department of Enterprise trade and Employment establish what is the median size of equity in Irish SME Balance Sheets employing less than 20 people. Let them set a target for where they wish it to be in five years time. We have put a great effort in to repairing the balance sheets of our banks, how about focusing on our businesses ? ©