Tax system for start-ups needs change of regime

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.

What's wrong?
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.”

Serial entrepreneur Niall Harbison, who left his job as a chef to become his own boss, said the lack of guaranteed income created additional pressure for the self-employed.

“Rather than your wages just being there on a Friday and being somebody else’s problem you suddenly have to make enough to pay yourself and that brings huge pressure.”

The CPA said there is widespread criticism of the fact that entrepreneurs are not entitled to Jobseekers Benefit should their business fail, as well as complaints relating to the effective disincentive to self-employment created by the lack of a PAYE tax credit for self-employed taxpayers.

The employee tax credit is worth €1,650 per annum or an effective subsidy of nearly €32 per week, which is available to every employee in the state but not the self-employed. Thus, if someone leaves their job to set up a business, they are instantly worse off by almost €32 per week, which isn’t exactly encouraging.

If a self-employed worker or entrepreneur loses his or her livelihood, they are not entitled to claim Jobseekers Benefit unless they have worked separately in employment within the previous four years. Instead, they are forced to rely on the more restrictive and means-tested Jobseekers Allowance.

This is despite the fact they pay the same rate of PRSI as their PAYE counterparts, and from next year they may have to pay more again.

Budget plans
At present, self-employed people pay a 4 per cent PRSI contribution on their earnings, but Minister for Social Protection Joan Burton is currently targeting the self-employed for increased PRSI charges in October's budget.

A mandatory 6 per cent PRSI contribution is expected to be proposed for the self-employed, in return for new long-term illness and disability benefits.

Mr Craddock, who employs 18 people at his Carlow-based company, said increasing PRSI rates will deter businesses from hiring.

“There has been a trend over the last few years that people are hiring contractors instead of employing people due to the high PRSI rates.”

Mr Harbison, who co-founded social media agency Simply Zesty before selling it on to UTV, recently launched media company PR Slides with model Emma O’Hara to take public relations online.

He said the lack of Jobseekers Benefit for entrepreneurs never worried him, but added it should exist.

“I’ve seen a couple of people try their best with a business and work extremely hard only to see the business fold for one reason or another. For them then to be treated worse than job seekers is just not right.”

He said home grown businesses were just as important as foreign multi-nationals for the future of the economy, adding that more efforts should be made to support them.

“We need way more breaks for people trying to start their own business or employing people. Why give the big multinationals all the tax breaks and preferential treatment yet make it harder for people to get going and create big companies here?”

“If this country is to turn itself around we need people out there starting businesses and employing people and starting things for themselves.”