Government policy, at both the local and national level plays a major role in fostering entrepreneurship. As the second largest city in the republic, Cork’s economy contributes significantly to the national GDP. While the city’s economy is vibrant, with a few policy changes, Cork can flourish into a true European economic powerhouse. Here we will focus on the more pertinent policy proposals necessary to create a regulatory environment that can sustain long-term economic growth.
The prevailing tax regime
V.A.T: The Irish SME association (ISME), and other entrepreneur advocacy associations, have long complained about the tax burden faced by local businesses which is reducing entrepreneurship in Cork. Ireland’s top VAT rate is 23%, which is one of the highest in the EU community. One of the changes being lobbied by ISME for the 2020 budget is a reduction of this top rate to a more manageable 21% which was the rate in the 90’s all the way to 2011.
Income Tax: These savings would be passed on to the consumer or used to assist with a much needed cash-flow boost giving the Irish economy (particularly the retail sector) a much-needed boost. For self-employed entrepreneurs, the shift from the 20% base rate and the 40% marginal tax rate occurs at an annual income of €35,300. There are recommendations for the 20% base rate to be applicable for annual incomes below €58,306 to reduce the tax burden on entrepreneurship.
Capital Gains Tax: The 33% capital gains tax, one of the highest in the OECD and the 3% USC surcharge for income exceeding €100,000 also seem punitive and might hinder entrepreneurship. The KEEP scheme, which allows SME’s to offer stock options to key employees without any taxation is not only complicated, but also restrictive in terms of which companies qualify. These so-called “incentives” need to be realistic but also practical.
Russell & Co accountants Cork have a team of experienced expert tax advisors to help formulate the right tax structure for your business. If your business involves a lot of travel, by you or your employees, we can also help you claim mileage and subsistence rates.
The commercial rate system
Local authorities rely on commercial rates for a significant portion of their revenue. The prevailing sentiment, at least within the business community, is that the existing system places an unsustainable burden on already struggling business owners and reducing entrepreneurship in the city.
In 2018, the City of Cork collected €123.7 million in commercial rates at an annual valuation rate of 74.98 (set annually at the Council budget meeting). This represented 38% of their total revenue, at a collection rate of 92.1%. Of the collected commercial rates, only 1% was reinvested towards economic development in the form of small grants to start-ups within Cork.
The four areas where reform is most needed by the business community are:
i. Arrears liability
Commercial rates are paid by business operators and tenants. Property owners are only liable when the premises are vacant. Under the current system, new property owners can be held liable for commercial rates arrears from the previous tenant for a period up to three years.
This creates additional costs adding to the capital costs of setting up a new business in Ireland. Setting up a new business can be a daunting task, which is why Russell & Co accountants Cork offer company formation assistance to start-ups. The service covers incorporation and administrative assistance such as payroll management, auditing and bookkeeping services.
The calculations for commercial rates involve multiplying the annual rate of valuation (ARV) by the rateable valuation. While the local authority determines the ARV annually during the budgeting process, the national valuation office is responsible for the rateable value.
The valuation framework in Ireland is archaic, with some of the legal basis coming from legislative documents dating as far back as 1898. Apart from being out-dated, the valuation process also doesn’t seem to reflect the prevailing difficult economic climate.
A valuation that does not represent the actual ‘true’ value often results in a disproportionately high commercial rate burden.
iii. Debt collection
The recent rates reform bill gives local authorities increased powers when it comes to debt collection for late and defaulted commercial rates. Local authorities now have the legal authority to go after the earnings, assets and bank accounts for anyone with rates arrears.
There was already a robust debt recovery framework available through the courts. These additional powers strip away protections from business owners and can be used as harassment tool by local councils.
With these expanded debt recovery powers, insolvency and liquidation have become a real threat facing Irish business owners. Russell & Co accountants Cork have over 40 years of experience providing assistance in insolvency and liquidation.
iv. State property exclusion
Commercial rates account for 34% of all local government revenue, this figure was 20% a decade ago. Local governments basically use commercial rates as a tool to plug their budget deficits. They calculate the annual rate of valuation based on the amount they need to raise and the total valuation of commercial premises within their jurisdiction.
Government property is however exempt from commercial rates. If brought into the system, the government can contribute between €77 and €87 million annually. Expanding the commercial rates base will go a long way towards reducing the burden on entrepreneurs and cutting back on the cost of doing business in Ireland.
Forecourt sales inclusion in commercial rates calculation
The valuation office recently made changes to the valuation process for Irish forecourt operators. Sales made by forecourt businesses (including fuel sales other examples) will now be factored in when valuation is carried out.
This move has, predictably, been met with a lot of opposition from business advocacy groups citing the unfairness of the policy. Other retailers and business entities are not affected by this change which leads to the perceived unfairness to forecourt operators.
Since VAT is already levied on sales (with fuel excise and other levies on petrol/diesel), this seems like an additional taxation measure. The ISME believes that this is a policy decision that should be handled by the Oireachtas and that the valuation office has overstepped its mandate.
The fact that sales inclusion only affects forecourt operators does add an additional strain to their operating costs over and above other businesses, which does seem unfair.
The Pana car ban and doughnut development
One of the most divisive policy decisions by the Cork local government was banning personal vehicle traffic along the St. Patrick main street between 3:00 in the afternoon and 6:30. This move was aimed towards reducing city centre congestion and promoting the usage of public transport.
It however comes at the cost of reducing foot fall within the city which affects businesses not just along St. Patrick Street, but citywide. The Cork City Traders association believes that the car ban has been directly responsible for the closure of numerous local businesses.
There is a move to withhold all commercial rates until the ban is permanently abolished. Businesses were already struggling with more consumers choosing to make online purchases.
The inner city car ban threatens to result in a doughnut type development, where city centre development stagnates, with most of the development efforts going towards the suburbs. Currently, Limerick city is spending a lot of resources to reverse the damage of “doughnut” development by rehabilitating its underdeveloped city centre.
This is something that Cork can avoid by reversing policy decisions that make it difficult for businesses to thrive within the city centre. Russell & Co accountants Cork offer business coaching to entrepreneurs trying to find winning strategies within an increasingly difficult economic environment.
Historically, entrepreneurship has been at the core of any period of sustained economic development particularly in Cork where there is a long tradition of self-employed business ownership. The government (at both the local and national level) need to base their policy-making decisions on nurturing entrepreneurship, not stifling it. They should also try to involve local traders in the decision making process to ensure fairness, charity and transparency for all involved.