PwC is urging the government to change the Irish tax system in October’s budget to better support Irish entrepreneurs and family businesses.

The firm said that its proposals are the result of a detailed consultation process undertaken by PwC with members of the DCU National Centre for Family Business and the Family Business Network.

Among the key proposed changes suggested by PwC are an increase in the threshold for capital gains that can qualify for the reduced 10% rate of CGT under Entrepreneurial Relief.

PwC is also recommending the removal of the “arbitrary” €3m cap on the value that can qualify for Retirement Relief on the transfer of shares for those aged 66 years of age and older. The firm also wants to see the removal of the 90% cap to provide full relief from CAT under Business Relief, similar to the equivalent relief in the UK.

“While current tax policy encourages the transfer of family businesses to the next generation at an early stage by minimising tax costs through the use of specific tax reliefs, there are certain limitations, anomalies and age limits associated with the current reliefs which may lead to higher than expected tax costs,” said Ronan Furlong, tax partner in PwC.

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“This could potentially put the business at risk in some cases and, at the very least, discourage business owners from making lifetime transfers.”

Talent Retention

PwC also proposes a raft of tax changes that it maintained will support job creation and key talent retention. The changes include the removal of the 3% levy on self-employed income, as well as more clarity around the Key Employee Engagement Programme (KEEP) share option plan. PwC also suggests that the KEEP plan be extended to part-time employees.

Marie Flynn, a director of PwC’s entrepreneurial and private business practice, said that for a variety of reasons, KEEP is not achieving the same success in Ireland as its equivalent is in the UK.

“To date, only 38 individuals have been granted KEEP options,” Flynn noted. “It is often appropriate to offer shares in a business to key management and employees. KEEP, if it was more tax-efficient, could be a powerful tool in retaining key talent and aligning the interests of key employees with that of the business.”

Other tax reforms suggested by PwC include increasing the limits available for relief under the Employment and Investment Incentive (EII) scheme, so that it can compete with the more generous UK equivalent of the EII (e.g. UK £1m per annum, compared with Irish €150,000).

PwC also wants to see the introduction of a ‘small claims’ division in the Irish tax appeals system to deal with smaller tax cases. Additional tax reforms suggested include a reduction in current annualised interest rate of 10% to be more in line with market rates, as well as the introduction of a ‘tax ombudsman’.

Business Sales

With regard to tax and business exits, PwC maintains that the government should introduce a ‘bona fide’ test to the recently introduced anti-avoidance legislation. The firm said that this would ensure that business owners are not subject to income tax on a sale of a business in a genuine commercial transaction.

“The current situation is that income tax rates of up to 55% can apply to some sales proceeds, as opposed to 10% or 33% for capital gains,” said David Keary, who is also a director of PwC’s entrepreneurial and private business practice.

“This differential in tax rates is discouraging family business owners in selling the business to the next generation, and instead, may push them to consider other exit strategies not involving the family.”