WHEN THE IRISH start-up success Storyful was sold to NewsCorp for a reported €18 million, serial entrepreneur and investor Ray Nolan pointed out that the company had created 40 PAYE jobs and the sale would deliver almost €6m in Capital Gains Tax to the exchequer.
Not a bad gain for the government, all told. It didn’t have to invent a new business model in the media world; attract the talent or the customers; nor did any Department of Finance mandarins have to quit their jobs or risk any of their savings to make it happen.
As Nolan wryly pointed out however, he could have made a better return had he just bought a building. Capital Gains Tax is what you pay on gains from certain types of investments, such as from the sale of a company or a building in which the price you get is higher than the investment you put in.
Pre-existing lumps of bricks and mortar are important things, but they’re not particularly well known for stimulating job creation. Yet, the government will reduce from 33 per cent to zero the amount of Capital Gains Tax property speculators have to pay, provided they hang on to a building for seven years.
Now, you might say “But there’s risk in that. How do you know what the price of that building will be in 7 years and what the gain might be?” That’s very true, and there has yet to be invented a surefire investment strategy guaranteed to make a return.
However, investing in start-up companies is surely among the riskier roads you can take for a return: the purchaser of a building will likely be generating rental incomes while hopefully sitting on an appreciating asset. A start-up investor is watching his or her cash be burned up to try and get the business going in a world where 75 per cent of start-ups fail.
For a government that puts ‘Jobs, jobs, jobs’ at the top of its agenda, offering this sort of a tax break to property speculators but not job creators doesn’t seem like such a logical move; except where it helps the State to offload some assets from NAMA and the balance sheets of its zombie banks. Such, alas, is the schizophrenic mindset of a State that has become so embroiled in the world of property and banking.
Capital Gains Tax has gone up four times since 2008, from 20 per cent to 33 per cent; and it brought in €369m of the total €37.8bn the State collected in tax last year. Not all of that tax is raised from entrepreneurs who sell their businesses.
We now come just behind France at the back of the European pack of highest CGT chargers. Competitor countries of ours like The Netherlands, whom the IDA would identify as a key challenger for foreign investment, charge no CGT.
Capital Gains Tax is a disincentive to invest and create jobs, plain and simple. If you’re a professional investor, such as an Angel Investment firm that would typically put money into high-risk start-ups, you weigh risks against potential rewards.
Say, for a flat example, you invest €20m into 20 start up companies and take 50 per cent of the equity in those companies in return. Experience shows that even if you are good at picking winners, 15 of those companies will fail.
Now, to break even – not even make a return on your investment – the remaining five companies need to increase in value by several hundred per cent. If the government takes 33 per cent of the gain in CGT, you have to take the bet that the company will be just that more successful for it to pay off in any meaningful way.
Or, if you’re a big investor, you could reduce your risk by taking your money to somewhere that charges less – or no – CGT.
And what if you’re not a big investor, but a small time entrepreneur or group of entrepreneurs seeking to pool your savings to get something going? Well, experience shows that you have a four in five chance of losing your shirt. When you’re thinking about plugging that cash you’ve worked so hard to earn from your safe bank account into a risky venture, that 33 per cent tax will be a disincentive. Why not buy an apartment block instead?
The rockier the government makes the road, the less likely people will decide to try move their cart down it.
Capital Gains Tax is a good way of making the rich pay their taxes. But it is not only rich people who invest into start-ups, and even if it was the social dividend of job creation is a great leveller in the equation, and CGT should be treated completely differently for job creation initiatives than other pursuits anyway.
The government did introduce a scheme from this year whereby CGT can be offset if a gain is re-invested into an enterprise designed to create jobs. The measure is more designed to delay the day you eventually pay the CGT than to reduce what you will pay, because if the new venture you plough the money into is successful then you will only get relief later on the amount you invested, or 50 per cent of the gain on the new venture; whichever is lower.
In other words, if you choose to take the potential 75 per cent risk that you’ll lose it all again on some new venture, the government will defer the tax till the day you’re successful a second time and give you a partial discount on the amount you risked. A bit more convoluted and risky than, say, buying another inanimate building and holding on to it for seven years.
We should reduce CGT on gains from job creating investments into new and expanding businesses, and take out the added element of risk that the government creates. It will cost us in foregone revenue, but help raise more money from income taxes and also provide the dividends that more employment bring the country.
If we’re willing to allow property investors to get off with zero CGT if they hold on to an asset for seven years, we could introduce simple and straightforward reliefs for entrepreneurs that reduce their tax based on job creation. Create ten jobs, halve the tax. Create ten more, halve it again. Or, better yet, just eliminate it as a disincentive altogether.
At the least, we should reverse the 65 per cent increase in the tax seen since 2008.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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