The relentless policy focus on attracting and retaining foreign direct investment has brought great benefits to Ireland. But now, more than ever, we must recognise that the SME and family business sector is facing an unprecedented crisis as a result of the Covid-19 pandemic.
The government has moved quickly so far to deal with the danger. Without further dramatic and rapid action, many businesses will fail to thrive and many will simply fail.
The SME sector is of huge importance, and failure to act to protect it would have profound consequences. SMEs employ 68 per cent of the country’s 2.3 million employees. The bulk of the burden of the economic crisis caused by Covid-19 will fall on this sector, particularly those operating in tourism, retail and food service, all of which rely heavily on cash flow for survival.
The temporary wage subsidy scheme and the deferral of tax and other obligations provide some security to these firms. However, after the initial 12-week period in which these supports apply, small businesses will continue to depend on generating cash flow, and they also have other non-payroll costs to fund on an ongoing basis. Government policy must focus on providing them with a means of surviving and returning to prosperity. They must be able to repair balance sheets and avoid drowning in debt.
Providing loan and other financial support in a fast, efficient way on terms that reflect the health-driven nature of this crisis is a critical next step. The channel that can used to achieve this (with some modifications) is funding from the European Investment Bank, overseen by a state body and distributed by the banks with clear eligibility criteria including a credit-scoring process. The funding supports introduced a couple of weeks ago in the US are a good benchmark.
There are also several further practical tax policy measures the government could introduce. Some of these involve reducing the tax burden on businesses, but remember, this is being done to ensure they can survive. If they don’t, they won’t be paying any taxes in the future, nor will they be employing people who pay tax.
Here are some practical measures that would immediately make a real difference. Businesses which have a proven record of paying payroll taxes in recent years could be given a tax credit against payroll taxes in the 2020-2022 period. Any gains on investment in SMEs in the next couple of years could be taxed at a low rate. We could return to the 9 per cent Vat rate for tourism and hospitality for a period.
Businesses will need to invest directly as a result of Covid-19. For example, some factories may need to reshape production lines to maintain social distancing. Businesses making such investments should be allowed to avail of tax credits through which they can claim the full cost of such investment against tax. Also, business losses this year and next could be offset against profits earned in prior years to cushion the blow.
There is a possible payroll measure too, which could not only ease payroll costs but also stimulate domestic demand. Currently, employers are allowed give employees €500 per annum in tax-free vouchers. This could be raised to €10,000 for this year and next, allowing employers put more money in employees’ pockets tax-free, so long as it is spent in the domestic economy.
Finally, a reintroduction of the home improvement scheme which allows for tax relief on qualifying home-improvement work would provide a badly needed stimulus to small and medium-sized construction businesses.
Many SMEs are family businesses, and such ventures will work very hard to survive a difficult period, even when the economic challenges question whether it makes strict business sense to keep going. Family businesses often have a different sense of purpose than others. Purpose for a family business is not just about the purpose of the business. It is also about the purpose of the family.
A recent Deloitte global family business survey found that successful family businesses tend to have one quality in common: a sense of purpose beyond being profitable.
Of course, making enough money to sustain a business is as important to family-owned concerns as it is to any other commercial enterprise. But they are also driven by unique pursuits that, for many, will define their legacies for years to come. Whether it’s a commitment to giving back to their community, becoming environmentally sustainable, or producing a perfectly crafted product, purpose informs everything they do. That sense of purpose will be further heightened in these unprecedented times.
So, some relatively short-term imaginative measures to support these businesses may reap great dividends. In Ireland today there is a large cohort of businesses, employing the majority of the workforce, who are facing real challenges, in some cases existential ones.
The government has been decisive and forward-thinking to date in its pursuits in supporting these businesses. What’s more, it is willing to engage with key stakeholders, organisations and industry bodies to discuss how it can do more. This is encouraging, as further government decisiveness and action could not only save the livelihoods of those who work there, but also preserve a layer of Irish business that enriches our society and community through its diverse activity and sense of purpose.
Pádraig Cronin is a partner and family business leader at Deloitte