Look to start-ups for the recovery
Sketching a business plan: new business startups must take centre stage in the recovery
The economy dropped by 6.1% in quarter two, the biggest drop on record. Take out the effect of multinationals and the fall is worse, at 7.4%.
Worst affected was building, down 38%, while retail and personal consumption, a key measure of domestic economic activity, decreased by 19.6% in the quarter.
This government and the previous administration have made trojan efforts to sustain businesses, unlike the fallout after the recession that followed the Celtic Tiger boom.
Of course some businesses will unfortunately not be saved.
The Government has nonetheless got it mostly right. Supporting business through employee support schemes, suspension and rebates of rates, credit guarantee schemes for loans, warehousing of Revenue debt, and a host of other supports, is the right thing to do.
It takes enormous effort to start a business. But the effort it takes to become an employer is even greater. A business person taking on an employee must have sufficient confidence in their business future, must have enough funds set aside to pay wages for a sufficiently long lead-in time, before the goods or services that employee creates translates into funds received by the employer. And the employer must have sufficient resources to put the working space, machinery and stock for that employee in place. And the employer invests time in interviewing, recruiting and training that employee.
When a business shuts, it can take a new entrant a whole lifetime to get back to the scale where that business once was.
Look back at the Celtic Tiger era, and household names that were involved in home construction, but were vapourised in the crash that followed.
It has taken more than a decade or so for other construction companies to gear up as formidable operators in the home construction market.
In a world of global competition, the costs of a new entrant setting up can be prohibitive, meaning a loss of those already in the game is a permanent loss to society.
We have seen global computer manufacturers move out of Ireland and not be replaced. Much of the damage to date has been in the services sector, which will be relatively quick to recover, given the importance of geographical location to the service provider, a quick lead-in time between supply and payment, and relatively low capital requirements.
From a national strategy perspective, we should double down on the importance of the 12.5% corporation tax rate.
Ultimately, strong and resilient businesses create and sustain employment. To help those who survive fill the gaps left by those who don’t, encourage a society that nurtures self-employment and business expansion, through a tax credit for taking on employees, for example.
Countries such as Germany and Singapore have over recent years made it part of their national strategy to encourage start-ups.
Measures such as reduced administration for small entities, a flat tax system which can allow a business pay a set amount of VAT based on turnover, and higher VAT exemption thresholds, are just some measures to help get businesses off the ground.
UK variants of these schemes allow businesses with turnover less than £85,000 to stay outside of the VAT net (in Ireland, it’s €37,500 for services and €75,000 for goods).
Those with turnover below £150,000 can opt for a flat scheme. Usually the amount of VAT a business pays or claims back from Revenue is the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases. With the flat rate scheme, you pay a fixed rate of VAT based on turnover and based on the industry sector you operate in.
In that UK scheme, you cannot reclaim VAT on your purchases, except for certain capital assets over £2,000.
Similar to the leased land exemption, tax reliefs could be introduced to grant property owners tax relief on commercial rental income in designated areas for startups.
The Global Startup Ecosystem Report 2020 placed Dublin in joint 36th of global ecosystems for startups.
Singapore, like the island of Ireland, has a population of about 6m. With additional focus and support over recent years, the number of startups increased significantly going up from 22,000 in 2003 to 43,000 in 2016.
Creating an ecosystem to encourage business expansion and startups means more than tinkering with the tax rules. Premises with subsided rent, access to business mentoring, access to employees subsidised to come off the live register, and support with marketing and advertising, are additional components.
Looking for the next Google or Amazon is unrealistic.
Ultimately, finding gainful employment for those who wish to be employed is the barometer by which the economy will be measured. So far, the government has made the right moves, setting the environment to encourage growth of existing businesses.
Now, new business startups must take centre stage.
Chartered tax adviser Kieran Coughlan, Belgooly, Co Cork.
