DRAFT legislation to support entrepreneurship and business start-ups in Northern Ireland "is a welcome step but doesn't go far enough", according to the Association of Chartered Certified Accountants (ACCA).
In July the government released draft legislation of the Finance Bill 2019 which will enable investors to obtain Entrepreneurs’ Relief (ER) where their shareholding is diluted as a result of raising funds.
The legislation aims to preserve ER on gains which have been accrued prior to a dilution of shareholdings, through the raising of external finance.
The issue of dilution is especially relevant to technology and life science companies, which are growing in Northern Ireland, where finance is obtained via successive rounds of venture capital fundraising. If an individual’s shareholding falls below 5 per cent after issuing new shares, any entitlement to ER may be lost.
But while welcoming the proposed legislation, ACCA Ulster Branch and Maneely McCann director Ciaran Fitzpatrick said that it does not go far enough to cultivate entrepreneurship.
“The current provision for ER has disincentivised many individuals and businesses from exploring funding options which would result in diluting the original shareholders," he said.
"The government’s paper acknowledges ER was introduced to incentivise and reward entrepreneurs who, with significant initiative and risk, play a key role in building and growing a business.
"The objective of the proposed changes is to ensure shareholders are not penalised because of how a company’s financing is structured in delivering a company’s growth plans.”
He added: “The entrepreneurial spirit of founding a company and growing a business should be encouraged. ER plays a vital part in incentivising the founding shareholders, and the risks they take, by rewarding them with a generous tax relief. Shareholders who are faced with the predicament of raising external finance to grow their business faster should be able to do so without the detriment of losing ER.
“The proposed ER changes is a watered down solution to the problem. Whilst it brings about a welcome change to the current ER rules, it stops short of a complete solution to incentivise entrepreneurs to maximise their company’s growth potential.”
Mr Fitzpatrick said that while the 10 per cent rate can be banked on gains arising immediately before the dilution event, ER will not apply to any gains on a future sale of shares.
"Such future gains will be taxed at the normal capital gains tax rates. Shareholders with an eye on ER, are incentivised to stall growth or sell their company prematurely before maximising the potential of their business," he said.
"This does not support the potential of their business nor the long-term contribution that it could make to the local economy and employment.”
