Michael D'Arcy (Wexford, Fine Gael) | Oireachtas source

I thank the Members of the Seanad for inviting me to this committee to take part in the consultation on small and medium enterprises, a sector which is the lifeblood of the Irish economy. According to the CSO, SMEs make up 99.8% of all active enterprises in Ireland, accounting for 69% of all employees, 39% of Ireland's gross value added and 48% of the total revenue generated by Irish based businesses. These figures demonstrate that SMEs are a crucial part of our economy. They have played a vital role in the recovery of employment growth in the country and it is a sector that this Government is committed to supporting. This support is needed now more than ever in light of the challenges facing Ireland next March with one of our biggest trading partners, the United Kingdom, due to leave the European Union. It is important in these times that we continue to support the sector as a key source of employment and to ensure its continued growth. It is not always possible to assist small and start-up businesses via the tax system. Businesses may not be profitable in their early years and as a result may be unable to benefit from income tax or corporate tax reliefs. However, our tax system has a role to play in supporting SMEs as one part of a wider support network. A number of incentives are available within our tax system which directly or indirectly benefit SMEs, some of which were amended as part of this year's Finance Bill process.

In relation to corporation tax, the three-year start relief for SMEs which was due to expire on 31 December 2018 is being extended in this year's Finance Bill until 31 December 2021. The three-year start up relief provides for relief from corporation tax for start-up companies in the first three years of trading with the value of the relief being linked to the amount of employers' PRSI paid by a company. The relief was first introduced in 2009 as an incentive to encourage new business start-ups creating additional employment and has been extended and enhanced on several subsequent occasions. Start-up ventures, most of which are SMEs, have a key role to play in generating economic activity and providing new jobs. The three year start up relief supports the survival of new start-up companies, which in turn leads to a broadening of the corporation tax base. A review of the relief, conducted by the Department of Finance and published on budget day found that the relief was an important support for new businesses. In 2016, the relief supported 1,051 companies with 15,597 employees. Based on expenditure cost €5.7 million, the average cost per job supported in 2016 was €352.

In speaking about SMEs, it is important to mention the research and development tax credit. The credit provides a 25% tax credit for all qualifying research and development expenditure. Where a company has claimed offset of the credit against its corporation tax liabilities and an excess remains, the company can make a claim for payment of the excess credit remaining. The existing refundable element of the tax credit can be of particular assistance to companies that are not currently making profits and this can be of relevance to SMEs in a research and development phase as the credit can effectively part-fund the research and development activity and act as a valuable source of cashflow. While there are no specific provisions for SMEs in the research and development tax credit, Revenue guidance was issued in February 2017 with the specific aim of reducing the administrative burden of the credit for relatively small claims for SMEs and micro-companies to encourage greater uptake of the relief by such companies. I am aware that some other jurisdictions, including the UK, have specific research and development regimes for SMEs. The research and development tax credit will be reviewed next year under the Department of Finance's tax expenditure guidelines. On Committee Stage of the Finance Bill 2018, the Minister for Finance, Deputy Donohoe, confirmed that the review will include consideration of the potential for SME-specific provisions to be introduced into the Irish research and development tax credit regime in next year's finance Bill.

Income tax based incentives also have a part to play in supporting small businesses, many of which commence or remain as sole traders or partnerships or are small corporate businesses benefitting from income tax based supports. Market failures mean that additional support measures are necessary to deliver financing and reduce costs to SMEs. This has been especially true in recent years and a range of measures have evolved to fill the gap, including the employment and investment incentive and the start-up refunds for entrepreneurs scheme. More recently, the key employee engagement programme introduced last year and the start-up capital initiative being introduced in the current Finance Bill demonstrate that we are ready and willing to come up with fresh solutions.

Small businesses need capital investment to survive and to grow and the tax system allows reliefs such as the employment and investment incentive, or EII, and start-up refunds for entrepreneurs, or SURE, to help businesses to source that funding. Earlier this year, amid industry concerns that the EII was becoming bogged down in delays and red tape, the Minister, Deputy Donohoe, commissioned a report to analyse the EII and SURE reliefs. The report, published last month, makes several recommendations to improve the efficiency and effectiveness the schemes, a number of which are being implemented in this year's Finance Bill. Further improvements are set for consideration in the context of next year's finance Bill. The most significant change in this year's Finance Bill is that claims for relief under EII and SURE are now to be made on a self-assessment basis. This will allow for a more simplified application process and for companies and investors to engage directly with each other on matters which can be self-certified or determined without Revenue intervention. To facilitate this process, the Finance Bill 2018 proposes a complete overhaul and simplification of the relevant legislation. Over recent years, the legislation for EII and SURE was amended to such an extent that it is all but impenetrable to most readers. A complete redrafting will mean that applicant companies, investors and their advisers will have much greater certainty and clarity on what the law actually is and how to claim the reliefs available. The Finance Bill 2018 also introduces a new scheme that allows family and friends invest in certain early-stage start-ups, namely, the start-up capital incentive, or SCI. Under the SCI, companies can raise up to €500,000 from investors who are connected with current shareholders. Family and friends are often the earliest investors in new micro-start-up companies and it is intended that this new relief will provide valuable support to these important new ventures.

As a business grows beyond the initial owner-operator phase, it becomes important for the continued development of that business to attract employees with new skills. This can be difficult in a competitive employment market and small firms can struggle to match the pay packages that larger, more well-established companies can offer. In 2017, the key employee engagement programme, or KEEP, was introduced to help SMEs to attract and retain talent through the use of share options. The take-up of the programme has been less than expected since its introduction in January last with some in industry observing that it is overly restrictive. To address this, the Finance Bill proposes relaxing certain restrictions and increasing the total value of options that can be granted to any one employee. The Government is committed to ensuring that KEEP operates effectively and will continue to keep it under review in this regard.

The Department of Finance will continue to monitor the effectiveness of these tax-based measures to ensure that they continue to provide the support intended. As I have said previously, the SME sector is crucial to the Irish economy and the Government is committed to providing a business environment to ensure the sector, which provides a significant level of employment in this country, continues to grow. I look forward to having a constructive conversation on the matter during the question and answer session.