For many years now I have been giving talks on raising money and tax schemes to incubators, accelerators and tech events across the UK & Ireland.
To many people it was a novelty or seen as a bit quirky that somebody would be so interested in this tax stuff. After many of the talks the familiar comments change to wow if I can do that, its worth a lot of money to our business and why doesnt my accountant know that. Put simply, startups dont start out thinking about tax but founders realise fast that it fundamentally changes what they can achieve in their business.
Recently I have felt obliged to change my tone when speaking in Ireland. I have always been positive and believe in promoting Ireland as a place to start a business but my views have hardened dramatically.
Ireland is a great place to live and work.
Ireland is a fantastic place to locate the EMEA headquarters of your hotshot American startup and that is why hundreds of companies like Twitter, Slack, Hubspot, Adroll and many more are adding hundreds of jobs in Ireland. The tax breaks, the access to great staff, and the welcoming environment all add up to a no-brainer.
However, Ireland is no longer a very competitive place to start a business. If you look at the tax schemes, entrepreneur supports, investor incentives, access to capital, etc., the unfortunate truth is that Ireland has fallen a long way behind the likes of our nearest neighbour, the UK.
The UK is such a more appealing proposition for a startup. Elaine Coughlan from Atlantic Bridge recently pointed out that for the 1st time in 20+ years it now seems more tax advantageous to have a US tax base. That is worrying but I will stick to the UK for now.
Let me be clear. I dont want to be the negative voice. I dont want negative stories about Ireland as a business destination online, but the reality is that we as a startup community must act together to correct this imbalance.
Im not an accountant and have no interest in being one. I picked up a lot of these tips as I know almost every accountant in Ireland from my days of looking after Sages Accountants Division. I also see how the companies we are investing in throughout the UK have a completely different experience to Ireland.
In this blog, Im going to:
- show the problems;
- give suggested solutions;
- outline how you can help.
The investment product:
When you start a business you are likely to be selling two products. The first is your goods and services. If you cant afford to get your goods and services to market using your own resources then you have a second product to sell, and that is an investment product.
Investing in a startup is not the most sensible thing to do in the world. VCs (which are deemed to be the experts) supposedly see a return from 12 out of every 10 investments. In short, this is a very risky asset class and incentives must be put in place. Governments like to put these incentives in place because new businesses create new jobs, jobs helps money flow, etc. and the economy benefits. Governments realised a long time that any tax break they give quickly comes back to them once the business starts to trade.
1. An incentive to start a business in Ireland:
A long while ago Ireland created an incentive called the Seed Capital Scheme. The idea was that you could get up to your last 6 years of tax back against any investment you make in your new business. This was a clever way to get people to leave Intel, Microsoft, or the other big companies and branch out. It helps them pay their mortgage and have some seed funds. 3 years ago the government cut the number of years you could claim from 6 to 4 years. Funnily enough this cut the amount being invested by 1/3.
Recently we got a Freedom of Information request to show in definite detail just how how much investment was dropping in Irish startups. The Irish Times were very keen on this and asked the Dept of Finance for comments. We finally got a response that the Dept was going to launch ‘SURE‘. Im ‘sure’ you guys have all heard the fanfare on this scheme. What is it? Well they put the number of years for seed capital back up from 4 to 6 again.
What does this tell us? Well it tells us that the government is on our side and they will react if we show them clearly what is failing. If we all stay quiet then nothing will change.
2. An incentive to get people to invest in my business:
This one is killing Ireland. Investors used to get 41% of what they invested back when they put money into a company.
3 years ago the government changed this and said you can get 30% back now and 11% in 3 years if their company is still in business. The result: 2/3 drop in the amount invested in the last 3 years. This is crucifying us!
In the UK an investor gets back up to 84%. Yes, you read that right – 84%!!!!
Not only that, however. If the investment pays off an Irish investor pays 33% Capital Gains Tax. In the UK they pay NOTHING!
If Im a UK startup my ‘Investment Product’ is much more appealing in the UK. Whats more if Im a financial advisor in the UK I am actively seeking out startups because my clients want the tax breaks. In Ireland financial advisors no longer sell BES or EIIS as its now called. Why? Well its just not as good when you view a product vs a pension.
As startups we need to get the government to give us the product to sell to the Doctors, Dentists or any other cash rich people in society.
3. An incentive to do R&D:
This one drives me nuts as its just so unfair.
Governments love R&D. Why? New products mean new jobs, which means new taxes, etc. In the UK if I spend money on R&D I get the tax back within 3 weeks of putting in the forms. In Ireland they pay in 3 installments over 3 years.
This means that an Irish company that manages to raise money to get started and then creates the jobs the government absolutely love will be put at a huge competitive disadvantage internationally. Changing this rule costs the government nothing apart from the cash flow hit to them.
I believe the Apples of the world can wait 3 years but smaller companies should be given this money immediately. We suggest that the first 150,000 is paid back immediately and the rest is spread over 3 years.
4. An incentive to sell my business:
If I sell a business I own in the UK I can pay as little as 10%. In Ireland I will pay 33%.
If Ireland want to build a network of Angel investors we have to make it appealing to sell all or part of their business. Right now its not worth giving the government 1/3.
We want people selling and reinvesting. This is not happening.
5. Allow Failure:
What do you get for having a go in Ireland, for trying to create jobs and create something new?
Nothing! No dole. No supports. No safety net.
So What Can You Do?
The government are listening and they have opened a public consultation process. They expect and will get formal responses from our industry bodies such as the ISA, IIA, StartUp Commissioner and many more.
What we really need is for you to submit your views. Submissions from SME companies and individuals are so much more powerful. Tell them your war stories. Tell them how you have raised money. Tell them how many jobs you would create if you had capital or if you got your R&D money back now. Tell them if you are thinking of leaving Ireland. Tell them if you have left Ireland already.
Email to submit at email@example.com.
We have made an infographic showing the differences between Ireland and the UK. If you want access to the original file we are happy to share them with you – just get in contact with me.
Let us try and make a difference to startups and to budding entrepreneurs that will be in need of this in years to come.