LONDON CALLING – Irish tech start-ups may have to move to the UK to survive

Trends & challenges

By Virginia Linehan

“We have great entrepreneurs and start-up businesses in Ireland – we just don’t have enough of them”. This is the repeated view of the Minister for Jobs, Enterprise and Innovation, Richard Bruton. On July 13th 2015, Enterprise Ireland announced a new €500,000 Competitive Start Fund (CSF) aimed at attracting entrepreneurs outside of Ireland to locate their start-up businesses in Ireland (Department of Jobs, Enterprise and Innovation, 2015). The CSF coincided with Start-up Gathering 2015 the goal of which is “to make Ireland a global start-up hub by 2020”. Both initiatives are part of a broader strategy outlined in the Government’s Action Plan for Jobs.

Ireland is known for having a vibrant enterprise scene hosting events such as the Web Summit which attracted 42,000 people from all over the world in 2015 (Web Summit, 2015). In addition, Ireland is the location of the European headquarters of the global tech giants such as Facebook, Apple, Twitter, Google etc. (Quora, 2011). As a consequence, Ireland has positioned itself a major player in Europe’s growing digital economy. Ireland and in particular Dublin is perceived to have an established and healthy start-up ecosystem. Evidence of this is in the abundance of national start-up events and bodies such as Enterprise Ireland, Start-up Ireland, Enterprise Northern Ireland and InterTradeIreland offering funding and support to entrepreneurs.

However, the incentives and assistance needed to develop early-stage start-ups in Ireland is significantly less favourable than in the UK. It is easier and more tax efficient to seek funding in the UK and therefore lean, agile Irish start-ups may have to relocate to Silicon Roundabout in London (Conmy , 2015). The Irish start-up system has been significantly damaged due the introduction of the Employment and Investment Incentive Scheme (EIIS) in 2011. That is the collective view echoed by many business leaders including the Dublin Commissioner for Start-ups, Niamh Bushnell, Chairman of Irish Venture Capital Association, Brian Caulfield and Gary Leyden, VP of Venture Acceleration at NDRC (an early stage investor in tech companies). Since the EIIS scheme replaced the Business Expansion Scheme (BES) the amount claimed by start-ups has dropped by two-thirds from €41m in 2011 to €16m in 2013 (Conmy , 2015). Investment in Irish EIIS has declining particularly in the area of tech start-ups (Dublin Commissioner For Start-ups, 2015).  At the same time Ireland introduced EIIS, George Osbourne introduced the Seed Enterprise Investment Scheme (SEIS) in the UK. The SEIS offers tax benefits to investors in small and early-stage start-up businesses. The SEIS has created a huge increase of jobs for tech start-up with job vacancies up 80% year on year since 2011 (Owen, 2015). Since 2012 over 2,800 UK start-ups have used SEIS to raise over £240m in essential early stage funding (HM Revenue & Customs, 2015). A Deloitte survey of UK Angel Investors revealed that “58% would have invested less or not at all if EIS/SEIS were not available” (Deloitte LLP, 2013). Research by the UK government-funded start-up initiative Tech City UK reveals that start-up activity in the UK is set to create a total of 20,000 new jobs across the country by the end of 2015 (Tech City UK, 2015). The SEIS has been so successful that was been made permanent in the UK’s 2014 Budget. It is not surprising therefore that London is ranked 6th in the Global start-up ranking system of 2015 (Compass.co, 2015).

In June 2015, the Minister for Finance, Michael Noonan launched a public consultation to seek feedback from the Irish public on the role the Irish tax system can play in encouraging entrepreneurship. In response, the office of The Dublin Commissioner for Start-ups in its submission to the Department of Finance stated that “job creation is not a tax issue it is a funding issue” and called for the minister to unlock early stage, private funding for high growth companies in Ireland by announcing the introduction of an Irish equivalent to the UK’s SEIS in the 2016 budget. The advice given was that failure to implement an equivalent SEIS scheme in Ireland would run the risk of losing the most promising start-ups to places like Newry or London to avail of SEIS.

In Budget 2016, as part of an “Entrepreneurship Action Plan”, the following revisions were made (Department of Finance, 2015):

  • An Earned Income Credit of €550 was introduced for taxpayers earning self-employed trading or professional income and to business owners/managers who are ineligible for a PAYE credit on their salary income.
  • Capital Gains Tax (CGT) Entrepreneurs Relief was revised down from 33% to 20% on the sale of a business with a cap of €1m.
  • Extension of 3 year Corporation Tax Relief for start-up companies until 2018 – This provides relief from corporation tax on trading income of new start-ups in the first 3 years of trading.
  • Knowledge Development Box (KDB): A corporate tax rate of 6.25% will apply to the profits arising to certain patent and copyrighted software from R&D carried out in Ireland.

According to the head of policy and chief economist, IBEC, this is been the “best budget for entrepreneurs in over a decade”. It has reduced the tax disadvantage faced by the self-employed and also reduce GCT down to 20% from the penal 33%. This will support entrepreneurs and small business owners which will generate economic activity to aid economic recovery.

However, there has been much criticism of Budget 2016. Despite the reduction of CGT to 20%, this statistic is not as competitive as the UK’s SEIS rate of 10%.  Similarly, the budget failed to mirror the UK’s SEIS with regard to employee equity incentives or share option schemes essential for start-ups to attract and retain talent. Moreover, the opportunity for improving the seed funding environment for start-ups in Ireland was missed by not introducing a UK SEIS equivalent (Irish Times, 2015). At a time when seed funding is running out and angel investment is quite low Ireland may need to weather the funding storm.

References

Compass.co, 2015. The Global Startup Ecosystem Ranking 2015. [Online]
Available at: http://startup-ecosystem.compass.co/ser2015/
[Accessed 14 November 2015].

Conmy , S., 2015. Start-ups in Ireland told it’s better to seek support in the UK. [Online]
Available at: http://www.digitaltimes.ie/grants-for-startups-in-ireland/
[Accessed 24 November 2015].

Deloitte LLP, 2013. Taking the pulse of the angel market. [Online]
Available at: http://www2.deloitte.com/content/dam/Deloitte/uk/Documents/about-deloitte/deloitte-uk-taking-the-pulse-of-the-angel-market.pdf
[Accessed 02 December 2015].

Department of Finance, 2015. Budget 2016. [Online]
Available at: http://www.budget.gov.ie/Budgets/2016/Documents/Budget%20Book%202016%20-%20full%20document.pdf
[Accessed 02 December 2015].

Department of Jobs, Enterprise and Innovation, 2015. €500,000 in new funding to attract international start-ups to locate to Ireland. [Online]
Available at: https://www.djei.ie/en/News-And-Events/Department-News/2015/July/13072015.html
[Accessed 26 November 2015].

Dublin Commissioner For Start-ups, 2015. Response to Public Consultation Process by the Department of Finance. [Online]
Available at: http://startupdublin.com/wp-content/uploads/2015/07/Policy-Submission-Dublin-Startup-Leaders-Group-10.07.2015.pdf
[Accessed 02 December 2015].

HM Revenue & Customs, 2015. Enterprise Investment Scheme and Seed Enterprise Investment Scheme July 2015, London: HM Revenue & Customs.

Irish Times, 2015. Expert verdicts: Five have their say on impact of Budget 2016. [Online]
Available at: http://www.irishtimes.com/business/expert-verdicts-five-have-their-say-on-impact-of-budget-2016-1.2390430
[Accessed 02 December 2015].

Owen, V., 2015. This year’s £1.3bn of funding to set digital firms on a hiring spree as tech start-ups see ‘terrific’ growth. [Online]
Available at: http://www.thisismoney.co.uk/money/smallbusiness/article-3123043/This-year-s-1-3bn-funding-set-digital-firms-hiring-spree.html
[Accessed 02 December 2015].

Quora, 2011. Which major companies have their European headquarters in Ireland?. [Online]
Available at: https://www.quora.com/Which-major-companies-have-their-European-headquarters-in-Ireland
[Accessed 26 November 2015].

Tech City UK, 2015. Tech City UK London’s Digital City. [Online]
Available at: http://www.techcityuk.com/investors/#sthash.Euo5c6ce.dpuf
[Accessed 02 December 2015].

Web Summit, 2015. Web Summit LISBON, NOVEMBER 7-10, 2016. [Online]
Available at: https://websummit.net/attendees/featured-attendees
[Accessed 26 November 2015].

 

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