As we look forward to Budget 2025, owners of Irish businesses remain concerned about cost pressures and would like to see some targeted efforts to support their businesses in this year's Budget.
Michael Lynch, Tax Partner and Head of KPMG Cork’s Private Enterprise team discusses some of the challenges facing Irish businesses, the key recommendations KPMG has made in its pre-Budget submission and why they remain bullish on growth prospects.
Cost will always be to the forefront of business owners' minds. While inflation, interest rates and energy prices begin to ease, the increasing cost of employment has emerged as the biggest challenge.
In the KPMG Enterprise Barometer 2024, 85% cited increasing cost of employment as their most significant business challenge this year, up from 43% in 2023. Despite this concern, 7 out of 10 plan to increase staff salaries in the coming 12 months and 39% plan to hire more.
To help address the cost of employment, in our Pre-Budget 2025 submission KPMG has suggested increasing the entry point for the marginal income tax rate and a cap on the amount of income subject to PRSI. We have also recommended introducing measures to encourage employers to develop accommodation for their staff and a BIK exemption for employees being provided with accommodation where their salary income is less than €50,000.
Whilst there are many challenges, encouragingly, our research shows that 4 in 5 business owners in Ireland want more action on climate change. 68% are actively pursuing a sustainability strategy and 67% are reviewing their business operations in light of sustainability concerns. While this sentiment is positive, there is still uncertainty around the cost benefit of sustainability practices with more than half (53%) stating they don’t fully understand the costs and benefits of sustainability actions.
Budget 2025 presents an opportunity for Government to encourage and incentivise sustainable business practices. In our Pre-Budget submission, we have proposed a range of policies focused on the reduction of our carbon footprint — with the added benefit of making Ireland an attractive location for business and individuals seeking to improve their carbon profiles.
The environment for domestic businesses in Ireland has many positives including talent, connectivity, and quality of life. However, the competitive environment for private Irish businesses is challenging. Only 29% of research respondents believe the Irish tax regime supports entrepreneurship and 7 in 10 believe tax policy is more challenging for domestic businesses.
In KPMG’s Pre-Budget submission we have made several recommendations. These include measures to encourage entrepreneurship, to simplify the tax system.
Take for example the rate of tax payable on dividends from SME’s. At a time when Ireland is looking to stimulate the domestic sector and position itself as a place for entrepreneurs, a 55% marginal tax rate on dividends does not reward risk appropriately. In many cases, promoters of SMEs have invested their life savings in their company. Often, long before the company has reached its full potential, a financial need will arise for a promoter to take something off the table (whether to buy a home or otherwise). Where a gain arises on an exit, the differential between this CGT rate and the marginal rate of tax often tips the scales towards a sale. As a result, SMEs are often sold before they maximise their potential. This issue is also holding back the indigenous SME sector from producing more companies of international scale. To address these issues, we have recommended that:
• a flat income tax rate of 20% be applied to dividends received from SMEs that exist wholly or mainly to carry on a trade; and
• a special reduced tax rate of 10% be introduced for dividends received by shareholders of SME companies who would otherwise qualify for entrepreneur relief on a sale of their shares.
On a subsequent sale of the shares, the amount of the gain qualifying for entrepreneur relief could be reduced by the amount of dividends received by the individual that qualify for the 10% rate.
We have also asked for the €10 million cap on capital gains tax retirement relief, set to take effect from January 1, 2025 to be paused or cancelled. From that date, a limit of €10 million will apply to the market value of assets that qualify for the relief where the disposal is made to a child and the disponer is aged between 55 and 69. A €3 million cap will apply from age 70 onwards (instead of 66).
I believe these measures will have a detrimental impact on lifetime inter-generational transfers of affected Irish businesses. Many business owners may as a result avoid burdening their businesses with capital gains tax liabilities during a transfer, depriving them of the entrepreneurial energy and vision that comes with inter-generational transfer. Furthermore, this may restrict the growth potential of Irish businesses and hamper the economy's ability to develop internationally scaled businesses.
Notwithstanding the challenges facing domestic Irish businesses, sentiment among business owners remains positive. Almost six in ten (58%) expect to scale up their operations, whilst almost two thirds (65%) are confident of their future prospects and expect turnover to increase in the coming year. This optimism exemplifies the ambition and resilience of Irish businesses to succeed and grow in uncertain times. Let’s make sure the policy levers at our disposal are fine tuned to support entrepreneurship and the jobs it sustains.
Read KPMG’s pre-Budget 2025 submission in full here.