Committee Reports::Report No. 01 - Manufacturing Industry::10 May, 1984::Appendix





There is no doubt that the most common complaint against Government from Small Businesses and their representatives is taxation. The present regime is criticised for the following reasons.

a)It represents a disincentive for investment and extra effort.

b)The paperwork and administration involved is both cumbersone, time consuming and expensive.

c)Some taxation measures have little relationship to the ability of the business to pay the tax.

d)The taxation level is simply so high that it represents unsustainable cost on industry.

The effect of high marginal rates of income tax and the capital taxes coupled with the Recession has stifled initiative and, in consequence, the establishment and growth of small businesses.

Increase in number of appointments of:





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While the Government and not this Committee must decide the tax levels in the Economy, the Department of Finance should carry out a cost benefit analysis of the proposals contained in this Report.

The practice of the Minister for Finance appearing to accept estimated assessments by the Revenue Commissioners for tax due by small companies as being correct should cease. It creates the impression that small business and the self employed are not contributing to the State when such may not be the case. Such statements of sums owed should be factual and not based on Revenue assessments which can be grossly overestimated.

1. Value Added Tax

The existing structure is both complex, cumbersome and penal. There are now six rates of V.A.T. : 35 per cent, 23 per cent, 18 per cent, 8 per cent, 5 per cent and 0 per cent. This alone represents a major difficulty to business in terms of form filling and book-keeping.

Rise in V.A.T.

Since 1980, V.A.T. rates have been increased on an annual basis. This has provided additional Exchequer revenue over that accrued from inflation and increased consumer spending. The standard rate of V.A.T. has been increased by 75% and the low rate by 130%. These rates of increase have added to inflation and capital outflows. It is apparent, therefore, that not only should the higher rates be reduced but that there be a maximum of three bands of V.A.T. and as much uniformity as possible.


To meet the problem of unpaid tax work that employers have to do not only for V.A.T. but also for employees in relation to P.A.Y.E. and P.R.S.I., it is suggested that a relief or allowance (as was available under turnover tax) would be re-introduced in the form of a £500 credit against the annual V.A.T. bill of a company that can prove to the Revenue Commissioners that they cannot afford a fulltime accountant. This would be of significant help to small businesses which possibly cannot afford a fulltime accountant.

V.A.T. at Point of Entry

It is strongly felt that the present structure of V.A.T. at the point of entry should at least be modified so that the Guarantee aspect of the present system is altered whereby the payment is only made on the given date in the two monthly period as opposed to a continuous drain on the overdraft accommodation of a company. It is therefore suggested that the Guarantee aspect of the scheme be dropped and replaced by a first warning system whereby only those who default on a payment at any stage would be asked to give a guarantee. It is also suggested that there be a Central Office for bank drafts of V.A.T. payments at the point of entry so that companies which are utilising different ports will not have to switch payments.

V.A.T. at the point of entry has had a crippling effect on industry by severely affecting the cashflow of companies and in cases reducing their overdraft accommodation. The abolition of V.A.T. at the point of entry is understood to cost £190 million this year. While this may be a major loss to the Exchequer, it must be weighed against the fact that at present industry is giving an interest free loan to the Government of the same amount. Therefore, in the medium term it should be abolished in the case of capital goods and materials for further processing.

2. Pay Related Social Insurance

The present levels of P.R.S.I. payable by both employee and employer are excessive and will have the direct effect of representing a disincentive for an employer to take on extra staff. A major structural reform of the P.R.S.I. system would be the most desirable solution in the long term.

The combination of P.A.Y.E. and P.R.S.I. payments would greatly simplify the bureaucracy involved and would remove what is a tax on employment. However, the effect of this change must not be to pass on the employer’s liability to the employee. It is envisaged that the employer’s contribution would be phased out over time in order to restore competitiveness.

It is suggested that in the short term, P.R.S.I. rebates of the full amount of the employer’s contribution in the first year of employment be given for additional employees. This would be clawed back in the event of the person being laid off in the next year so therefore in order to obtain a rebate of P.R.S.I. payments, the new employee would have to be retained for a two year period at least. This would be to avoid abuse. The concession would not be given where displacement of staff is concerned. This proposal would directly relate the tax concession to the employment creation and would not be a pay subsidy.

In the case of labour intensive industries, consideration should be given to allowing companies to opt for:

(a)the retention of the 10 per cent rate of Corporation Tax and payment of the normal P.R.S.I. contributions, or

(b)a higher rate of Corporation Tax while obtaining exemption from employer’s P.R.S.I. contributions

(c)the amendment of the Social Welfare Acts to enable personal insurability of individual small businessmen through the payment of full voluntary contributions by and benefits to such self employed persons.

3. Pay As You Earn

The top rate of income tax at 65 per cent is a disincentive to obtaining the right type of management and expertise in many businesses, which is the vital factor between success and failure.

It is also worth noting that a single individual taxed under the P.A.Y.E. system will have a contribution to the State of 73.5% (income tax 65% P.R.S.I. 8.5%) when his salary reaches £12,686.

Many such personnel have similar opportunities in other countries with more lenient rates of tax. In January 1984, a Survey of 109 companies showed that:

(a)80 key members of staff had been lost to other countries in the previous year

(b)A further 97 key members of staff were expected to be lost in the forthcoming year. Approximately half the number of staff likely to be lost were in the technology sectors of electronics, electrical, chemicals, plastics and healthcare.

To facilitate the retention of key personnel and to encourage management performance we recommend that:

(i)the top rate of income tax be reduced to a maximum of 60%

(ii)special income tax rebates be available to export and marketing personnel who spend more than 30 working days per year outside the country and to key technical staff.

For many employees the difference between gross and net income is such that it makes pay agreements all the more difficult between employers and employees. It is therefore suggested that proposals by the F.U.E. to use a Government tax deal as part of an overall pay deal should be implemented.

The existing taxation on productivity bonuses and overtime penalises productivity and therefore should be reviewed and reduced to improve company performance.

4. Capital Taxation

Capital gains tax and capital acquisition’s tax have been increased in recent years and can represent a major difficulty for expanding firms and in the area of inheritance. Prior to the 1982 Budget, for certain gains the rate of Capital Gains Tax payable reduced in accordance with the period of ownership. For assets held for more than 21 years the rate reduced to zero. The 1982 Finance Act abolished tapering relief. The new system provides for a standard rate of Capital Gains Tax of 40% with higher rates for short term gains (60% for assets held for less than one year, 50% for assets held between one and three years). We recommend that the application of roll over relief revert to the situation prior to 1982. For Capital Gains Tax there should be an extension of Roll Over and Tapering reliefs. The thresholds should be index-linked for both Capital Gains and Acquisition taxes and the higher rates reviewed in such a way that only speculators are penalised. The gift and inheritance taxes introduced under the Capital Acquisition’s Act 1976 are a major problem for the smaller firm because the rates have been set far too high and the threshold of £150,000 established for inheritance taken on or after the 1st April 1975 has not been adjusted since to take into account the rise in inflation.

Although levied on individuals as donees, the resources to meet usually have to be taken out of the business. If the owner attempts to pay the tax out of income, he must do so after paying the present high rate of income tax. The alternative is to meet the tax from capital. The sale of a partial shareholding in a small business is not usually a practical proposition and the sale of specific assets damages the business. Reductions in capital acquisition tax is an important requirement and in addition, the threshold should be adjusted to take into account the inflation rate since 1975.

5. Home Sales by Export Sales Relief (ESR) Companies

Companies which obtained an entitlement to export sales relief to the end of 1980 continue to be entitled to that relief unless they opt into the tax scheme of 10 per cent manufacturing tax under Chapter 6 of the Finance Act, 1980. A company which remains entitled to export sales relief and which also has sales on the Irish home market has three options:

a)Opt for the 10 per cent manufacturing tax on profits from all sales - home and export, or

b)Continue to exercise the entitlement to export sales relief, and pay the full normal rate of corporation tax on profits from Irish home market sales, or

c)Establish a separate manufacturing company to supply the Irish home market thus having two companies one which is totally supplying export markets and is entitled to full export sales relief, and the other which is solely supplying the Irish market and is entitled to the 10 per cent tax rate.

There are costs involved in establishing a separate company to supply the Irish market, and multi-national companies may find it more advantageous to export all production and to supply the Irish market from an overseas company base. This would adversely affect jobs in Ireland not least because of the creation of a cumbersome and costly channel for supplying the Irish market with goods which have been manufactured here. It would also militate against the establishment of the marketing function in the Irish company.


Amend Chapter 6 of the Finance Act, 1980, so as to allow a company which is entitled to export sales relief to avail of the 10 per cent manufacturing tax on profits from home market sales without losing the entitlement to export sales relief and without the need to create a separate manufacturing company to supply the Irish home market.

6. Other Taxes

Other taxes such as excise duties, stamp duties, and various levies, should be closely monitored and reduced where possible, particularly automotive gas diesel which is by far the highest in the E.E.C. Irish business and industry pay £75 per 1000 litres additional tax over and above the weighted E.E.C. average.

7. Jobs Tax Credit

The point has been made that tax relief in itself may not be in the best interest of the country and the Government should insist on an employment creation related aspect of any tax concessions, given the current cost of employment creation plus the scarce resources of the Government. It is therefore felt that the existing scheme in the United States whereby employers can obtain a tax credit on any of their tax liabilities for extra employment created is worthy of full consideration here. It is suggested that a tax credit be introduced of £400 for the first year and £250 in the second year of employment for creating an extra job. This credit can be set against any of the employers tax liabilities e.g. Employer’s PRSI Corporation Tax, V.A.T., etc.



Legislation in Ireland when introduced encompasses all companies within in Irish Economy. No consideration is given to whether the companies are large or small, capital intensive or labour intensive, manufacturing or distribution. It is our opinion that failure to give such recognition is to the detriment of employment creation within the small firm sector. However, on another level, economic and political encouragement is being given and so the question should be asked, should legislation play a part in encouraging small businesses specifically.

It is our opinion that a number of areas need examination, not necessarily to scrap or totally alter the total thrust of the legislation but to amend it to best suit both the employer and the employee in a small company. These areas are

-Administration of Legal Structures

-Employment Legislation

-Company Law

-Administrative Law

1. Administration of Legal Structures

The present Court structure was first established by the Court of Justice Act 1924. It now derives its authority from Article 34 of the Constitution.

As such the Court structure is organised on a hierarchical basis with the District Court, which has the narrowest jurisdiction at the bottom. It is the District Court that most small businesses find themselves in. The problem is that debts which small businesses incur have to be written off because they are too costly to collect and cannot be efficiently and effecitvely pursued without the use of a lawyer in the District Court. In addition legal fees are expensive and exceed, on occasion, the debt.

The problem of the backlog of cases for hearing at the District Court is a problem for small businesses. The delay in getting to the Court now works to the advantage of the debtor, and can be abused by deliberate procrastination pending a settlement in the Court of Law. A small company can ill afford such delays. The small businessmens’ only practical approach is to single out about one in twenty of his debtors, pursue that debtor vigorously and publicly through the Courts (at whatever cost) and hope that this will frighten his remaining debtors into paying promptly.


What is therefore required by small businesses is a method that is reasonably quick, simple and can be operated by a non lawyer or a system where lawyers may appear but fees cannot be claimed against the other party. The problem could be overcome by the development of a small claims system as operated in Norther Ireland. In essence this is a two tier system operating under the umbrella of the County Courts where the lower end of the lower tier has a monetary limit of £1,000 and the system is regarded as an arbitration rather than an action with a registrar operating under the provisions of the Arbitration Act (Northern Ireland) 1937.

2. Employment Legislation

In dealing with this section we recognise the difficulty in proposing any changes in these areas and accept that labour law is delicate enough without interference from this Committee and our comments should be seen in the context of exploring possible options rather than dictating policy.

The small company is in the main, labour intensive and in most cases may not be able to take advantage of much of the new technology, due to lack of capital. As a result small companies feel the burden of employment legislation proportionately more than larger companies. A small company is now apprehensive of hiring additional employees because of the present legislation, particularly,

-The Redundancy Payments Act 1967

-Unfair Dismissals Act 1977

-Maternity Protection of Employees Act 1981

It is recognised in law that the relationship between the employer and the employee is based on a contract of employment, and in essence involves an agreement by the employees to do work of a certain type and in certain conditions in return for remuneration, wages. However, given that it is modified by statute and is ongoing we feel that a review is required with regard to these employment Acts whereby the existing rights of an employee remain, but also an employer of a small company is not as restricted as at present.

(a) Redundancy

Redundancies arise where an employee is dismissed because the employers requirement for employees has ceased or diminished. It has beenfound that except in cases of liquidation the employees representatives can and do negotiate redundancies at higher than the statutory requirement. This is their entitlement under the collective bargaining system. However, it should be borne in mind that small companies are at a disadvantage vis a vis larger companies in that

-they are unable to sustain a protracted disagreement

-they are unable, due to working capital pressures, to settle for large payments or even existing industrial norms

-they do not possess negotiating skills to resist pressures in an industrial relations situation.


Some scheme must be envolved to ensure that employment creation occurs in smaller companies and that such employers are not apprehensive regarding new employment. The creation of a fund controlled and operated jointly by individual firms and their employees might be a solution. Such a redundancy fund could be created by amendments to existing revenue collecting legislation but must ensure no extra cost to the small firm.

(b) Unfair Dismissals

The thrust of the Unfair Dismissals Act, 1977 contains the definition of Fair and Unfair Dismissals, provides extensive procedures of arbitration and requires employers to formulate and adhere to dismissal procedures. The Act nevertheless, circumscribes the small company in its operation and involves them in considerabel industrial relations problems and the Industrial Relations function is a function that sometimes small companies are inadequately prepared for.

In addition, small labour intensive companies now find themselves liable in a dispute and have to argue their case under the terms of this Act to either a Rights Commissioner, the Employment Appeals Tribunal or even the Circuit Court. The effect of this system on an employer is the avoidance of hiring of personnel because in essence when a new employee is added to the payroll a potential additional Industrial Relations problem is created.


It would not be appropriate for the State to be directly involved in assisting small firms. We feel that the responsibility for the solution to this problem lies with small firms by joining their representative bodies.

(c) Maternity Protection of Employees Act 1981

On initial examination there is nothing fundamentally wrong with this legislation, the cost in monetary terms to an employer is small as the employer is not under any legal obligation to pay an employee during the absence on Maternity leave. However, to a small company given the dependancy of the company on staff, the non availability of staff arising from maternity leave cannot be measured only in monetary terms. A small company cannot afford a disruption from non availability of staff whereas a large company in a similar situation is better able to cope.

Under the terms of the Act the employee is entitled to reinstatement in the same job or equivalent. Failure by an employer to comply with these terms involves the employer in an industrial Relations problem. From a social viewpoint this legislation is desirable, from a small company viewpoint it can be a barrier to the employment of women as it holds out the prospect of disruption to a company. It is regrettable that the impact of this legislation is felt mostly by small labour intensive companies in the most vulnerable section of Irish manufacturing industry.

Such legislation may have a counter productive effect to that intended.


We are not opposed to any employment legislation but feel that full prior consultation should be undertaken to ensure complete implementation with such Acts. Where relevant, provision should be made whereby the employer may employ on a contractual basis an employee who would be liable for his or her own P.A.Y.E., P.R.S.I. - to overcome staff disruption.

3. Company Law

(a) Limited Liability

Most small companies are privately owned and operated. In addition most are limited liability companies under the terms of the 1963 Companies Act. In theory the benefits available to the businessman in forming a company arise from the creation thereby of corporate personality for his undertaking and limited liability for himself. In practice for small companies the practice of limited liability is circumvented by Banks and other financial institutions as they insist on personal guarantees from the owner(s) or shareholders. Therefore the limited liability holds only for trade and other creditors who tend to be other small companies also. As a result from the beginning a small company will tend to suffer from lack of equity and a high level of bank borrowing. All the risks are being borne by the company and its shareholders and the rewards are favouring the financial institutions.


Personal guarantees should not be required for a new small company start up or for sums up to £20,000, where the promoter has strong financial commitments to the Company.

(b) Insolvency

The problems of delinquent directors abusing the concept of limited liability should be tackled. In liquidations small companies are usually unsecured creditors and so have the problem of dealing with companies (small and large) who set about deliberately abusing existing company law. We would call for new comprehensive Companies Act implementing some fo the solutions proposed below. We would see the problems as follows:

(i)Delinquent Directors

The problem of delinquent directors who salvage the assets of one company only to start trading with another should be tackled.


Such directors should be personally liable for debts and barred from managing any company for a period of 10 years as determined by the Courts.


The concept of an administrator should be available to small companies who are creditors of any other company (large or small). Larger companies can have inordinate purchasing power over small companies. However, if a large company is insolvent or near insolvency, there is nothing a smaller company may do under the present insolvency laws to ensure a reorganisation.


Small companies should have access to a Court to appoint an Administrator whose functions would be to ensure that the company is rescued on behalf of creditors.

(iii)Unsecured Creditors

The position of unsecured creditors has to be examined as the present law is unfair in its distribution between creditors of different classes. In liquidation unsecured creditors are usually left with nothing after preferential creditors, usually the taxman, followed by holders of floating charges have been looked after.


We would recommend the abolition or restriction of the rights of preferential creditors and the setting aside of part of the proceeds in a liquidation for unsecured creditors. These proposals together with a streamlining of the problems of personal bankruptcy will strike a balance between the conflicting interest of companies and creditors of all types. It is important that this be recognised because a more entrepeurial Ireland will involve taking more risks also, and commensurate with this more people will fail.

4. Administrative Law

This is an area of law that is inclined to bring about the worst complaints by smaller companies, some without justification. It is difficult for a smaller company to understand that Acts relating to aspects of planning, environment, pollution control, Regional policy, Exchange Control, etc. are part of a broader picture for the greater good of society as a whole. However, not all administrative law is perfect and it is our opinion that with very little alteration to existing legislation, improvements could be made to the benefit of the smaller companies. Areas of concern to smaller companies are as follows:

Planning Law

Industrial Rates

(a) Planning Law

There is considerable disquiet about planning law among small businessmen. Companies wishing to erect or convert buildings to set up a venture cannot get planning permission without an extremely hazardous and costly procedure.


(i)Refunds of planning permission charges should be given to small manufacturing firms where permission is refused.

(ii)Appeals to An Bord Pleanala must be decided upon within 6 months.

(b) Industrial Rates

The full onus of Local Authority rates revenue now falls on the industrial and commercial sector (£100m in 1983). There are a number of inconsistencies in calculating valuations for industrial premises. Often the rates due bear no relationship to services rendered or profitability. We feel that maybe one way would be that rates relate to specific services rendered by Local Authorities. Therefore the rates paid would represent the value of the services received. Whatever method is adopted we are of the opinion that small and medium sized companies in the traded sector are being discriminated against and we would urge some legislative action to alleviate this problem.


(i)A total review of the Valuation System based on profits.

(ii)Uniformity between different Local Authorities as to the rate in the £ payable.

(iii)A relationship between services provided and rates paid.


Chapter 1.

Business Environment

-Develop positive attitudes to risk taking in Ireland

-A third tier of electricity tariffs for small industry

-Provision of more incubation type industrial premises

Chapter 2.


-A Government Loan Guarantee Scheme

-A scheme to channel personal savings into loans for industry

-Establishment of Small Business Investment Companies as venture capital vehicles

-Reduction in the minimum limits for European Investment Bank

-Provision of same interest rates to large and small firms

-Interest subsidies for small firms that do not have access to reduced interest rates.

-Availability of Section 84 loans to small firms

-Better liaison between banks and small businessmen and better understanding by banks of small business problems including intensive staff training in small business problems and staff secondment

-More flexibility in operation of Export Credit Finance and Insurance Schemes

-More flexibility by Central Bank towards Hold Accounts for small firms

-Greater flexibility in grant aid package

Chapter 3.


-Greater Government emphasis on need for more management skills

-More emphasis on management assessment prior to approval of grant assistance

-Management secondment schemes to small industry from public and private sector

-Wider access to management training and more emphasis on in-company training

-Implementation of a 3-year specialist in-company management training programme on a pilot basis

-Better follow-up mechanisms on the part of State Agencies responsible for training

-Annual broadly based assessment of small businesses by appropriate Body

-Panels of retired executives and suitable graduates to assist small firms

-More relevant Business curriculum in second level education



Chapter 4.

Marketing, Product Development and Quality Control Domestic Market

Revamped Irish Goods Council (renamed Irish Marketing Board) with responsibility for:

-Overall co-ordination of indigenous marketing

-Promotion of Irish goods

-Liaison with I.D.A. on development of company marketing plans

-Market information and analysis

-Consultancy service to individual firms

-Monitoring linkages (in conjunction with I.D.A.)

-Implementation of an Irish standard

-Prosecution of firms promoting Irish relabelled imported products

-Co-ordinate the provision of a comprehensive list of import substitution products

State Procurement

-A comprehensive data bank to be held by Irish Marketing Board

-Simplification of tendering procedures

-Field trials or pilot purchases for sole Irish manufacturers

-Reserving 30% of all State purchase for small firms

-Discrimination in favour of small business by Government Contracts Committee


-Long Term emphasis on marketing education and foreign languages

-Grafting marketing personnel onto existing companies

-Switch in emphasis from grants for fixed assets to market development

-Establishment of sales agency service

-Grant assisting new marketing or trading companies

-Assistance in overcoming technical barriers

-Greater use of Embassy and Consular services

-Network of warehouse facilities across Europe

-More grant assistance to small firms

-Eliminate recruitment restrictions on CTT

-Support for CTT proposals on Market Entry and Development Finance, Distributor Support Programme, and Group Marketing Schemes.

-Support for CTT’s proposals for Market Research Scheme, Purchases of Market Information and competitiveness analysis of Irish company

-Switch in emphasis from trade missions to company aid

Product Development

-Making Third Level Institutions responsible for publicising new technology developments

-Create awareness of need for product development

-Increase I.D.A. R and D grants to 75%

-Tax relief for increased R and D expenditure

-Post graduate awards in Science and Technology

-Funds for student business ideas

Quality Control

-Insistence on quality control plans in any grant package

-Increased training

-“Quality Approved” stamping of all Irish manufactured products



Chapter 5.

State Agencies

Establishment on a pilot basis of County Small Business Centres which would:

-serve as a local “one stop” office

-be staffed from existing State Agencies, staff would have functional autonomy

-liaise with existing County Development Teams and local authorities.



Chapter 6.


-Lower and reduce range of V.A.T. rates as soon as possible

-reintroduction of £500 credit against V.A.T. bill of company

-guarantee aspect of V.A.T. at Point of Entry Scheme be dropped

-option of 10% CPT and payment of normal P.R.S.I.


-higher rate of CPT and exemption from P.R.S.I.

-use of tax deal as part of overall pay settlement with reduction in P.A.Y.E.

-tapering and roll over reliefs in Capital Taxation be restored to pre-1982 position

-raise threshold for Capital Acquisitions Tax

-allow companies with Export Sales Relief to avail of 10% Corporation Profits Tax for Home Market Sales

-reduce other taxes and duties as circumstances permit

-introduce Jobs Tax Credit



Chapter 7.

Legal Problems

-establish Small Claims Court

-evolve scheme to ensure that small firms are not apprehensive regarding provision of additional employment

-small firms should join representative Employer Bodies

-Delinquent directors be liable for debts and barred from managing any company as directed by courts

-introduce concept of Administrator

-abolition or restriction of rights of preferential creditors

-refund planning permission charges when permission refused to small manufacturing firms

-an Bord Pleanala to decide appeals within 6 months

-review system of Industrial Rates.




Ivan Yates,